SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                           ________________________
                                       
                                   FORM 10-K
(Mark One)

 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

          For the fiscal year ended July 31, 1998

                              OR

 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

          For the transition period from __________ to __________

                        Commission file number 1-10615

                         EMISPHERE TECHNOLOGIES, INC.
            (Exact name of registrant as specified in its charter)

                 DELAWARE                         13-3306985
        (State or jurisdiction of              (I.R.S. Employer
      incorporation or organization)        Identification Number)

       765 Old Saw Mill River Road
           Tarrytown, New York                       10591
     (Address of principal executive              (Zip Code)
                 offices)

                                (914) 347-2220
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

                                     None

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock - $.01 par value
                        Preferred Stock Purchase Rights

     Indicate by  check mark  whether the  Registrant (1) has filed all reports
required to  be filed  by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required  to file  such reports)  and (2)  has been  subject to such filing
requirements for at least the past 90 days.  Yes  X    No ___

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of  Regulation S-K (Sect. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or  information statements  incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [  ]

     As of  October 21, 1998, the aggregate market value of registrant's common
stock held  by non-affiliates was approximately $81,000,000, based on a closing
sale price  of $7.50  per share,  and 10,999740  shares of  registrant's common
stock were outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

Definitive proxy statement to be filed  by the registrant on or before November
28, 1998...............................................................Part III

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS


  Certain statements under the captions "Business" and "Management's Discussion
and Analysis  of Financial  Conditions and Results of Operations" and elsewhere
in this  Annual Report  on Form  10-K constitute  "forward-looking  statements"
within the  meaning of  the Private  Securities Litigation  Reform Act of 1995.
Such forward-looking  statements involve known and unknown risks, uncertainties
and  other   factors  which  may  cause  the  actual  results,  performance  or
achievements of the Company to be materially different from any future results,
performance or  achievements  expressed  or  implied  by  such  forward-looking
statements. Such  factors include,  among others,  the following: uncertainties
related  to  future  test  results  and  viability  of  the  Company's  product
candidates, which  are in  the early  stages of development; the need to obtain
regulatory  approval  for  the  Company's  product  candidates;  the  Company's
dependence  on   partnerships  with   pharmaceutical  companies   to   develop,
manufacture and  commercialize  products  using  the  Company's  drug  delivery
technologies; the Company's dependence on the success of its joint venture with
Elan Corporation  plc ("Elan")  for the development and commercialization of an
oral heparin  and low  molecular weight heparin product, its strategic alliance
with Eli  Lilly and Company ("Lilly") for the development and commercialization
of certain  of Lilly's therapeutic proteins and its research collaboration with
Novartis Pharma  AG ("Novartis")  to investigate  the Company's  technology for
oral delivery  of two  selected Novartis  compounds; the  risk of technological
obsolescence  and  risks  associated  with  the  Company's  highly  competitive
industry; the  Company's dependence  on patents  and  proprietary  rights;  the
Company's absence of profitable operations and need for additional capital; the
Company's dependence on others to manufacture the Company's chemical compounds;
the risk of product liability and policy limits of product liability insurance;
potential liability  for human clinical trials; the Company's dependence on key
personnel and  the quality,  judgment and strategic decisions of management and
other  personnel;  uncertain  availability  of  third-party  reimbursement  for
commercial medical  products; general  business and  economic  conditions;  and
other factors referenced or incorporated by reference herein.


                                    PART I


ITEM 1. BUSINESS.

Overview

  Emisphere  Technologies,   Inc.  ("Emisphere"   or  the   "Company"  or   the
"registrant")  is  a  drug  delivery  company  focused  on  the  discovery  and
application of  proprietary  synthetic  chemical  compounds  ("carriers")  that
enable the oral delivery of therapeutic macromolecules and other compounds that
are not  currently deliverable  by oral  means.   To  date,  the  biotechnology
industry has developed therapeutic macromolecules, including proteins, that are
administered by  injection.   It is  expected  that  research  efforts  in  the
genomics field  will accelerate the discovery of new therapeutic proteins.  The
Company's carriers enable the transport of therapeutic macromolecules and other
compounds through  biological membranes,  including intestinal,  nasal, buccal,
sublingual, subcutaneous and intraocular membranes.

  Emisphere has  designed and  synthesized a  library of potential carriers and
evaluated them  for their  ability to  enable the  oral delivery of therapeutic
compounds.    The  Company  has  used  its  carriers  to  deliver  heparin,  an
antithrombotic/anticoagulant, orally  in humans  and to  deliver a  variety  of
compounds, including  heparin, insulin, human growth hormone, calcitonin, human
parathyroid hormone, cromolyn and deferoxamine, orally in animals.  The Company
believes that  total worldwide  sales of  the injectable  formulations of these
compounds are  over $5.0  billion and  that the market for these compounds will
expand if they are available in oral form.

                                      -2-

  The Company's strategy is to facilitate the development of products utilizing
its drug  delivery technologies  by entering into collaboration agreements with
pharmaceutical companies.   The Company's collaborations currently consist of a
joint venture  with Elan  to develop  oral formulations  of heparin products, a
strategic alliance with Lilly for the delivery of several proteins with a focus
in the  area of  endocrinology and  a research  collaboration with  Novartis to
investigate the Company's technology for oral delivery of two selected Novartis
compounds.

  Under the  joint venture with Elan, the parties have formed Ebbisham Limited,
an Irish corporation owned 50% by Elan and 50% by the Company ("Ebbisham"), for
the purpose of exploiting Elan's drug delivery and formulation capabilities and
the Company's  carrier technologies  in the research, development and marketing
of oral  formulations of  heparin products.   The  Company has  completed eight
Phase I clinical trials on behalf of Ebbisham, which trials have indicated that
an oral  formulation of  heparin was  well tolerated with no unexpected adverse
drug reactions.   In  May 1998  the Company  announced that  it had initiated a
Phase II  clinical study  for the  use of  its oral  heparin  product  for  the
prevention of  deep vein  thrombosis.  In August 1998 Elan and the Company each
contributed  an   additional  $5   million  to  Ebbisham,  resulting  in  total
contributions of  $9.5 million  by Elan  and $5  million by the Company.  As of
July 31,  1998, the  Company's revenues  from Elan  or Ebbisham under the joint
venture agreements  totaled $14.1  million.    In  addition,  in  May  1998  an
affiliate of  Elan  exercised  warrants  to  purchase  250,000  shares  of  the
Company's Common Stock at an exercise price of $16.25 per share.

  The strategic  alliance with  Lilly is  intended  to  utilize  the  Company's
technologies for  the improved  delivery of  certain Lilly therapeutic proteins
with  a   focus  on  oral  delivery.    The  major  therapeutic  focus  of  the
collaboration is in the area of endocrinology, including growth disorders.  The
agreement with  Lilly grants  Lilly options  to license applicable carriers and
market the  products utilizing  the combined technologies.  In March 1998 Lilly
exercised its  options with  respect to two of its therapeutic proteins, one in
the field  of osteoporosis and the other in the area of endocrinology including
growth disorders.   In  September 1998  Lilly  formally  selected  one  of  the
Company's proprietary  carriers for  clinical testing of an oral formulation of
Lilly's therapeutic protein for the treatment of osteoporosis.  Upon completion
of all  required toxicology  testing, an  Investigative New Drug application is
expected to be filed with the Food and Drug Administration.

  The Company  and  Novartis  entered  into  their  research  collaboration  in
December 1997.   It provides for an initial research collaboration period of at
least 12  months and  an option on the part of Novartis to acquire an exclusive
license  to   use  the   Company's  technologies   for  the   development   and
commercialization of  oral  formulations  of  the  Novartis  compounds.    Upon
exercise of  its option  to acquire  a technology  license  from  the  Company,
Novartis has the obligation (which may be waived by the Company) to purchase in
four tranches  up to  $16 million of the Company's Common Stock at prices based
on market  prices at the time of exercise (subject to certain price limitations
with respect  to the  first tranch).   Under the agreement, Novartis is to make
quarterly payments  to the  Company  for  work  performed  by  the  Company  in
connection with  the collaboration  and is to make future payments in the event
certain milestones are achieved.


Business Strategy

  The  Company's   objective  is   to  become  a  leader  in  providing  orally
administered therapeutic  compounds that  are not currently deliverable by oral
means.   The Company's  strategy to  achieve  its  objective  incorporates  the
following principal elements:

                                      -3-

     - Identify appropriate therapeutic compounds that address large markets.

     - Discover and  design carriers  for the  oral delivery of the therapeutic
       compounds identified.

     - Establish  collaborative   arrangements  with   leading   pharmaceutical
       companies.

     - Enhance and protect the Company's proprietary technology base.

     - Expand the Company's internal product development capabilities.


The Drug Delivery Industry

  Companies involved  in drug  delivery are  seeking  to  enhance  the  use  of
therapeutic agents  by expanding  the available  dosage forms. Traditional drug
delivery companies  develop technologies  that control  the release  of  drugs.
Examples of  products in  this category include transdermal patches and tablets
that can  be  once-a-day  versus  multiple  daily dosing.  Such tablets are for
drugs that have already demonstrated oral absorption.

  There is an emerging group of drug delivery companies, including the Company,
developing novel technologies that offer alternatives to the existing route for
administration of  that drug.   These  companies are  seeking  technologies  to
increase the  potential  for  therapeutics  that  have  not  been  commercially
developed,  used  effectively  or  successfully  marketed  because  of  limited
practical means of administration. For example, macromolecules such as proteins
or other  poorly absorbed therapeutics currently are administered predominantly
by injection.


Oral Drug Delivery

  The Company  believes that  oral dosage  forms  of  pharmaceuticals  are  the
largest product  segment of  the pharmaceutical industry and that the potential
market for many drugs could be significantly expanded if novel delivery systems
are developed  for therapeutics that are currently available only as injectable
drugs. The  Company believes  that  oral  administration  would  represent  the
preferred modality  of delivery  for many  pharmaceuticals, including  a  broad
range of  biotechnology derived  therapeutics and  drugs that  require  chronic
dosing.

  The three main barriers to effective oral drug delivery for humans are:

     - Degradation of  Drugs by Acid and Enzymes: The high acid content and the
       enzyme activity  of the  digestive tract  can degrade  some  drugs  well
       before they  reach the  site of  absorption into  the  bloodstream.  All
       natural and  recombinant peptides,  as well  as certain  compounds  with
       carbohydrate and  lipid components, are susceptible to this degradation,
       limiting the commercial potential for these compounds.

     - Poor Absorption  of Drugs Through Epithelial Tissue: Many macromolecules
       and polar  compounds  cannot  effectively  traverse  the  cells  of  the
       epithelium in  the small  intestine to reach the bloodstream. Thus, some
       drugs  with   beneficial  medicinal  properties  are  often  limited  to
       injectable formulations,  which may  not be  commercially viable for the
       treatment  of  chronic  disease  because  of  poor  patient  compliance.
       Development and  commercialization  of  many  macromolecules  and  other
       poorly absorbed  compounds may  become practical  with an  effective new
       delivery system.

     - Transition of  Drugs to  Insoluble Form  at Acidic pH: Many drugs become
       insoluble at  the low  pH encountered in the digestive tract. Since only
       the soluble  form of  the drug can be absorbed into the bloodstream, the
       transition of  the drug  to the  insoluble form can significantly reduce
       the amount absorbed.

                                      -4-

Emisphere's Drug Delivery Technologies

  The core  of the Company's delivery technology is the design and synthesis of
compounds that  maximize the  transport of  drugs across  biological membranes.
The Company's  technologies exploit the properties of supramolecular complexes,
which are  formed when  two or  more compounds  are held together in a discrete
geometry by  relatively weak  molecular interactions.  A supramolecular complex
will have  a number  of properties  that  are  measurably  different  from  its
constituent parts.  Many of the drugs that are currently used to treat diseases
must be  administered by  injection due  to  their  inability  to  survive  the
environment of  the gastrointestinal  tract and/or  to be  transported from the
gastrointestinal tract.  The Company believes that the supramolecular complexes
formed when its proprietary compounds are formulated with many injectable drugs
renders them  transportable from  the gastrointestinal  tract to  the blood  in
quantities that are clinically useful and commercially attractive.  The Company
believes that  certain conformations  of  some  drugs  appear  to  render  them
transportable across  biological membranes.    The  Company  believes  that  an
effective carrier significantly increases the population of naturally occurring
transportable conformations  of the  drug to  be delivered.   The  Company  has
identified  characteristics   of  supramolecular  complexes  that  it  believes
correlate with in vivo performance.

  The Company  has synthesized  a library  of well-defined, proprietary carrier
compounds that  are single  molecular entities  which can  form  supramolecular
complexes with  a diverse  array of  injectable therapeutics.   These "carrier"
molecules vary  widely in their chemical structure, solubility, hydrophobicity,
electrostatic and  other physical/chemical  properties.   The Company  believes
that, in  many cases,  an individual  therapeutic agent  will require  its  own
unique  carrier   for  optimal   oral  delivery.    Based  upon  an  individual
therapeutic's characteristics,  the  Company  seeks  to  identify  the  optimal
carrier by in vitro and in vivo screening of the Company's expanding library of
carrier compounds.   The  Company believes that technologies are available that
could allow  high throughput  synthesis  and  in  vitro  screening  of  carrier
compounds, thereby  reducing the  time required  for  identifying  the  optimal
carrier for a given injectable therapeutic.

  On the  basis of  the limited  clinical and  preclinical trials  to date, the
Company believes that its oral drug delivery technologies have the potential to
achieve the  key properties essential for effective and reproduceable oral drug
delivery, including:  (i) absorption of the drug in an appropriate manner, (ii)
consistent release of the drug into the bloodstream, (iii) lack of toxicity and
(iv) maintenance of the biological effects of the drug.

  The Company  believes that the supramolecular complex formed by the Company's
carriers and  certain  therapeutic  compounds  may  have  applications  in  the
delivery of  drugs through  other biological  membranes, including  intestinal,
nasal, buccal, sublingual, subcutaneous and intraocular membranes.

 Key Characteristics of the Company's Technologies

  The Company  believes that  its oral  delivery approach  may  have  potential
competitive advantages, including:

     - Broad applicability:  The Company's  carriers are  applicable  across  a
       diverse group  of molecules  (proteins, carbohydrates,  and peptides and
       other poorly absorbed compounds).

     - Stand-alone delivery  approach: Oral  drug delivery  using the Company's
       carriers does  not rely  upon addition  of other  agents that  can  have
       adverse effects on the intestinal membranes or digestion process.

     - Versatility of  formulation: The  Company believes that various types of
       oral formulations,  including suspensions,  tablets and capsules, can be
       created.

     - Ease of manufacture: The technology and manufacturing equipment required
       to produce  the Company's  carrier material in commercial quantities are
       readily available.

                                      -5-

Market Opportunity

  The table below lists a representative sample of product candidates for which
the Company  has demonstrated  oral  delivery  in  mammals  using  its  carrier
technologies.

                                                     PRIMARY
            PRODUCT CANDIDATE                      INDICATIONS
            -------------------------------------  ---------------
            Heparins                                Clotting
            Insulin                                 Diabetes
            Human Growth Hormone                    Growth
            Calcitonin                              Osteoporosis
            Human Parathyroid Hormone (analogues)   Osteoporosis
            Cromolyn                                Asthma/Allergy
            Deferoxamine                            Iron Overload
            Erythropoietin                          Anemia

  Because the  collaboration agreements  with Lilly  and Novartis  require  the
Company to keep confidential the identity of the compounds that are the subject
of those agreements, the information below is provided without giving effect to
those agreements.  For a  description of  those agreements,  see "Collaboration
Agreements".

 Therapeutic Macromolecules

  Heparin.  Heparin   is  a   widely  used   anticoagulant/antithrombotic  drug
prescribed primarily  for cardiovascular conditions, including acute myocardial
infarction, coronary  angioplasty,  coronary  artery  bypass  graft,  pulmonary
embolus, stroke, unstable angina and deep vein thrombosis ("DVT").

  The Company  has completed  eight Phase  I clinical trials with a liquid oral
heparin preparation,  has initiated  a Phase  II clinical  study for  its  oral
heparin preparation  for the prevention of DVT and intends to pursue additional
clinical  with  initial  on  DVT  in  patients.   The  Company   believes  that
its  oral  heparin  product  will  ultimately  be  applicable for  a wide range
of  anticoagulant/antithrombotic   uses   and  that  an  oral  alternative  may
significantly  expand  the overall  heparin  market,  currently  constrained by
injectable-only administration.

  The Phase II clinical study, which was begun in May 1998, involves three arms
of approximately  40 patients  each.   Each patient will have undergone surgery
for hip  replacement.   Two different  doses  of  the  Company's  oral  heparin
formulation  are   being  compared   to  a   dose   of   heparin   administered
subcutaneously.   The  study  is  being  conducted  in the  United States.  The
objective  of  the  study  is to demonstrate that orally  administered  heparin
utilizing  the  Company's  proprietary  technology  is  well-tolerated  and  is
comparable to  heparin administered  subcutaneously  in  preventing  deep  vein
thrombosis.

  In March  1996, the  Company submitted  an investigational  new drug  ("IND")
application for  an oral  liquid formulation  of heparin  to the  Food and Drug
Administration (the  "FDA").   In order to prepare the IND, the Company engaged
in  preclinical  testing  which  included,  among  other  things,  (i)  maximum
tolerated dosing experiments, (ii) acute and subacute toxicity testing, (iii) a
pharmacological screen,  (iv)  mutagenicity  testing,  (v)  dosing  preparation
stability analysis,  and (vi)  absorption, distribution,  metabolism, excretion
(ADME) studies.   The  results of  these tests  demonstrated, in part, that the
carriers dosed at quantities substantially greater than the quantities that the
Company proposed  to administer  to humans  (i) caused  no damage to intestinal
tissue, (ii)  produced no  pharmacological activity  on its  own, (iii) was not
sequestered in  any body  tissue, and  (iv) caused no genetic alterations.  The
IND was prepared based on the compilation of these preclinical testing results.

  A summary  of the  study results  from the  first three  Phase I  results was
presented at  the American  Heart Association  meeting in  November 1996  and a
paper about  these Phase I clinical trials is expected to appear in the journal
Circulation in October 1998.

                                      -6-

 Therapeutic Protein and Peptide Products

  Among the  protein and  peptide products  to which  the Company is seeking to
apply  its   carriers  are   insulin,  calcitonin,  human  growth  hormone  and
parathyroid hormone  analogues.   All of  these products, with the exception of
the parathyroid  hormone analogues  (which is  in  clinical  development),  are
currently being marketed as injectable products.

  Insulin.   Studies performed  by groups  such as  the  Diabetes  Control  and
Complications Trial  Research Group  (the DCCT  Research Group) have shown that
the risk  of degenerative  complications can  be greatly reduced if people with
Type I  diabetes (insulin dependent diabetes) lower their average blood-glucose
toward the  concentrations typical  for non-diabetic  individuals.   However, a
patient needs  to inject  insulin several  times per  day in  order properly to
regulate his glucose.  This level of compliance is difficult to achieve with an
injectable formulation  of insulin and the Company believes an oral formulation
would increase  compliance.   Emisphere has  demonstrated that its lead carrier
for insulin  is able  to achieve therapeutic utility through oral delivery in a
diabetic rat model comparable to that obtained following subcutaneous injection
of the compound in the same model.  However, there can be no assurance that the
results achieved  in rodents  are predictive  of future test results in humans.
Substantial additional testing will be required.

  Human Growth  Hormone.  While a number of new indications are being explored,
the majority of human growth hormone sold is used to treat children with growth
deficiencies.   The current  preferred dosing regimen in children entails daily
injections for up to 10 years or more.

  The Company's  lead carriers  for recombinant  human growth hormone have been
tested in  rodents and non-human primates and the tests indicated oral delivery
of therapeutic  drug levels was achieved in these animals.  In addition, growth
studies conducted  in animal  models have  demonstrated that the drug is active
after delivery  to the  blood when the drug is dosed with the Company's carrier
into the  gastrointestinal tract when compared to subcutaneous delivery.  There
can be  no assurance  that test  results  achieved  in  rodents  and  non-human
primates are  predictive of  future results  in humans.  Substantial additional
testing will be required.

  Calcitonin.   Osteoporosis is  a disease  that afflicts  many post-menopausal
women and older men.  Calcitonin is used to treat osteoporosis as an injectable
solution or  nasal spray.   The  Company has  demonstrated the oral delivery of
therapeutic drug  levels of  calcitonin in non-human primates.  There can be no
assurance that  test results  achieved in  non-human primates are predictive of
future results in humans. Substantial additional testing will be required.

  Human Parathyroid  Hormone.   Currently, a number of pharmaceutical companies
are in  various  stages  of  clinical  testing  to  determine  whether  certain
analogues of  human parathyroid  hormone (hPTH)  are effective  in reducing the
bone fractures  which are  associated  with  osteoporosis.    The  Company  has
demonstrated oral  delivery of  three different  hPTH  analogues  in  non-human
primates.   There can  be no  assurance that  the results of tests in non-human
primates are  predictive of  results in humans.  Substantial additional testing
will be required.

 Poorly Absorbed Organic Compounds

  The  majority   of  pharmaceutical  products  are  small  organic  molecules.
Pharmaceutical companies  often identify  biologically  active  compounds  that
cannot be  delivered orally  due to poor absorption.  The Company believes that
its carriers may be useful for oral delivery of such compounds.

  Cromolyn.  Cromolyn is a mast cell stabilizer used in the treatment of asthma
and allergies.   The  Company has  demonstrated oral  delivery of  cromolyn  in
rodents.   There can be no assurance, however, that such results are predictive
of results in humans.  Substantial additional testing will be required.

                                      -7-

  Deferoxamine.   Deferoxamine (?DFO?)  is the  only approved iron chelator for
use in treating iron overload resulting from frequent blood transfusions in the
treatment of  illnesses such  as  beta  thalassemia  and  sickle  cell  anemia.
Currently, dosing  involves a  12-hour subcutaneous  infusion 5  days per week.
The Company has demonstrated oral delivery of therapeutic levels of DFO in non-
human primates.   There  can be no assurance that test results achieved in non-
human  primates  are  predictive  of  future  results  in  humans.  Substantial
additional testing will be required.

 Vaccines

  The Company  is exploring  the applicability  of its  carriers for humans and
animals in the field of vaccines.  The Company has conducted experiments with a
number of  antigens.   The results  of  dosing  rodents  orally  with  antigens
combined  with   the   Company's   carriers   were   an   increased   secretory
Immunoglobulin A (sIgA) response, increased Immunoglobulin G (IgG) response and
CD4 T-cell  proliferation.  These results indicate that oral vaccination may be
possible using  the Company's  carriers.   There can  be no assurance that test
results achieved  in rodents  are  predictive  of  future  results  in  humans.
Substantial additional testing will be required.


Collaboration Agreements

  The Company's strategy is to facilitate the development of products utilizing
its drug  delivery technologies  by entering into collaboration agreements with
pharmaceutical and  biotechnology companies that have the financial, scientific
and marketing  resources to  fund  development  of  specific  products  through
clinical trials,  to obtain  regulatory  approval,  to  manufacture  the  final
products in  commercially viable  quantities and to market the products through
their sales and marketing organizations.

  The Company  is currently  having discussions with a number of pharmaceutical
companies regarding  potential applications  of  the  Company's  drug  delivery
technologies for  their proprietary drugs.  There can be no assurance, however,
that any  agreements will be consummated as a result of these discussions, that
any resulting  agreements will  yield revenues  to the  Company, that  any such
companies will  pursue  product  development  until  a  commercial  product  is
achieved or  that, once  achieved, any  such companies will continue to produce
and sell the product and pay royalties to the Company.

  Ebbisham Limited.   In  September 1996,  the Company and Elan formed Ebbisham
Limited, an  Irish corporation  owned 50%  by  Elan  and  50%  by  the  Company
("Ebbisham"), for the purpose of utilizing Elan's drug delivery and formulation
capabilities  and   the  Company's   carrier  technologies   in  the  research,
development and marketing of oral formulations of heparin and heparinoids.

  The agreements  with Elan  and Ebbisham  provide for:  (i) the  grant by  the
Company to Ebbisham of an exclusive, worldwide license of the Company's carrier
technology for  new dosage forms of heparin and heparinoids (the "Field"), (ii)
the grant  by Elan  to Ebbisham  of an  exclusive,  worldwide  license  of  its
formulation technology  for the  Field, (iii)  the  grant  by  the  Company  to
Ebbisham of  a  right  of  first  refusal  to  license  the  Company's  carrier
technology to  commercialize  additional  anticoagulant  compounds  other  than
heparin and  heparinoids, (iv) the grant by the Company and Elan to Ebbisham of
exclusive  royalty-free   licenses  to   use  their  respective  trademarks  in
connection with  products in the Field, (v) the requirement for the Company and
Elan to  make contributions  in equal  portions to  the extent  needed to  fund
Ebbisham's financial  requirements, (vi) the sharing by the Company and Elan of
the financial  benefits and  expense obligations  of Ebbisham on a 50/50 basis,
although there  are certain  limited circumstances  under which Elan has a $4.5
million limited preference over the Company in returns from Ebbisham, and (vii)
equal representation  by the  Company and  Elan on  the Board  of Directors  of
Ebbisham.

                                      -8-

  Whenever commercially  or technically  feasible, Ebbisham  will contract with
the Company  or Elan  to perform research and development services on behalf of
Ebbisham.   The Company  and Elan  will be  reimbursed by Ebbisham for all such
research and  development work  at the conclusion of each stage of the research
and development  program.   As of  July  31,  1998,  research  and  development
services performed  by the  Company on  behalf of  Ebbisham  had  generated  an
aggregate of $14.1 million in revenues to the Company.  On August 5, 1998, Elan
and the Company each contributed an additional $5 million to Ebbisham.

  If  Ebbisham   elects  to  proceed  with  commercialization  of  any  product
candidate, the  parties anticipate  that the  Company will  enter into a supply
agreement pursuant  to which it will sell carriers to Ebbisham and that Elan or
one of  its affiliates will enter into a supply agreement with Ebbisham for the
commercial production  of the  product candidate by Elan on behalf of Ebbisham.
Such supply agreements would be on customary commercial terms and negotiated in
good faith  by the  parties.   The Company  will also supply Ebbisham with such
carriers as are required by Ebbisham for its research and development programs.
Unless otherwise agreed by Elan and the Company, the supply of the carriers for
the research  and development  programs will  be at cost so long as the Company
holds at least a 45% equity interest in Ebbisham.

  Upon the  occurrence of an event of default under the joint venture agreement
with Elan,  the non-defaulting shareholder will be entitled to make an offer to
purchase the  defaulting shareholder's  interest in  Ebbisham.   The defaulting
shareholder will  then be  obliged to  sell its  interest to the non-defaulting
shareholder at the offered price or to make a counteroffer to purchase the non-
defaulting shareholder's  interest at  a price that is at least 10% higher than
the previous  offer.   Each side  may make one additional counteroffer provided
its offer  is at  least 10%  higher, as adjusted, than the previous offer.  The
Elan Joint  Venture also  provides Ebbisham  with a right of first refusal with
respect  to  the  use  of  the  Company's  technologies  for  the  delivery  of
anticoagulant compounds.

  Pursuant to  an agreement  between the Company and an affiliate of Elan, Elan
and its  affiliates have  agreed, subject to certain exceptions, not to acquire
additional shares  of the Company's voting securities until September 26, 2001.
During  the   term  of  such  agreement,  Elan  and  its  affiliates  have  the
opportunity, in  the event  the Company  issues and sells voting securities, to
purchase newly issued voting securities in an amount that would enable Elan and
its affiliates to own the same percentage of the Company's voting securities as
it owned  before such  issuance and  sale.  In the Company's public offering of
1,150,000 shares  of the  Common Stock  in July  1997,  an  affiliate  of  Elan
purchased 90,000 shares for $19.00 per share.

  Eli Lilly.  In February  1997, the  Company and Lilly entered into a Research
Collaboration and  Option Agreement  (the "Lilly Agreement") to combine Lilly's
therapeutic protein  and formulation  capabilities with  the Company's  carrier
technologies.

  The Lilly  Agreement provides  for periodic payments to the Company to fund a
research and development program to study the use of the Company's technologies
to develop  oral and  non-oral  formulations  for  delivering  two  of  Lilly's
therapeutic proteins  (the "Subject Proteins") in the areas of osteoporosis and
endocrinology including  growth disorders.  The initial term of the program was
18 months,  which term was extended automatically for an additional six months.
Any extensions  beyond February 1999 must be approved by the Company and Lilly.
Also, if  Lilly decides  to expand  the scope of the program, the amount of the
payments will be increased.

  Under the  Lilly Agreement, the Company granted to Lilly a series of options,
each  to   acquire  an  exclusive,  worldwide  license  to  use  the  Company's
technologies in  conjunction with oral and non-oral formulations of the Subject
Proteins.   In March  1998 Lilly  exercised two of its options and entered into
two  license   agreements  granting  Lilly  the  right  to  use  the  Company's
technologies in connection with oral formulations of the Subject Proteins.  The
license agreements  provide that  Lilly is obligated to seek to market the oral
formulations of  the Subject  Proteins and  that the  Company is  obligated  to
provide a  material  portion  of  the  supply  of  carrier  necessary  for  the
production of any such formulations.  For so long as Lilly continues to develop
oral formulations  of the Subject Proteins, Lilly will continue to have options
to acquire  licenses to use the Company's technologies in conjunction with non-
oral formulations of the Subject Proteins.

                                      -9-

  In September  1998 Lilly  formally selected  one of the Company's proprietary
carriers for  clinical testing  of an  oral formulation  of Lilly's therapeutic
protein for  the treatment  of osteoporosis.   Upon  completion of all required
toxicology testing, an IND application is expected to be filed with the FDA.

  The Lilly  Agreement further  provides Lilly with a right of first refusal to
make an offer to enter into a license to use the Company's technologies for the
delivery of  a limited  number of other therapeutic proteins and peptides.  The
right of first refusal allows Lilly to obtain the license if it exceeds a third
party offer  by a  specified premium.   The  right of  first refusal expires on
August 26,  1999.   The Lilly  Agreement also contemplates the possibility of a
continuing relationship  for the  development of  delivery  systems  for  other
therapeutic proteins.

  Under  the  Lilly  Agreement,  the  Company  will  own  all  patents,  patent
applications, and other proprietary expertise relating to its technologies that
it develops  as well  as any  material Lilly  improvements or  additions to the
Company's technologies, and Lilly will own all patents, patent applications and
other proprietary  expertise relating  to the  therapeutic uses of its proteins
(to the  extent invented  during the Program).  If Lilly makes recommendations,
suggestions or  has discussions  with the  Company that  result in  a  material
addition to  or improvement  of the  Company's technologies, then Lilly may, in
certain circumstances,  obtain limited preferences with respect to licenses for
Emisphere technology  covering Lilly  proteins or  products other  than for the
Subject Proteins.

  In addition,  the Lilly Agreement includes a standstill provision pursuant to
which Lilly has agreed, with certain exceptions and limitations, not to acquire
shares of the Company's outstanding voting stock above a specified limit.

  Novartis Pharma  AG.  In December 1997, the Company and Novartis entered into
a research  collaboration to  investigate the  Company's  technology  for  oral
delivery of  two selected  Novartis compounds.   The  agreement  with  Novartis
provides for an initial research collaboration period of at least 12 months and
an option  on the  part of  Novartis to acquire an exclusive license to use the
Company's technologies  for  the  development  and  commercialization  of  oral
formulations of the Novartis compounds.

  Upon exercise of its option to acquire a technology license from the Company,
Novartis has the obligation (which may be waived by the Company) to purchase in
four tranches  up to  $16 million of the Company's Common Stock at prices based
on market  prices at the time of exercise (subject to certain price limitations
with respect to the first tranch).

  Under the  agreement, Novartis  is to  make quarterly payments to the Company
for work  performed by  the Company in connection with the collaboration and is
to make future payments in the event certain milestones are achieved.


Patents

  The Company's  strategy is  to apply  for patent protection on all aspects of
its proprietary  chemical and  pharmaceutical delivery  technologies, including
materials and  compositions of  matter for  both the carrier and complexes of a
carrier with  a pharmaceutical  or chemical  agent, processes for manufacturing
the carrier,  new carriers,  uses of  the carriers and improvements on its core
technology that are important for the success of the Company's business.

  The Company has patents or pending patent applications for carriers currently
used by  the Company  in conjunction  with heparin,  insulin, calcitonin, human
parathyroid hormone,  human growth  hormone, alpha interferon, deferoxamine and
cromolyn.   The Company  has been  granted 23  patents  on  its  drug  delivery
technologies in  the United States which will expire beginning in 2007, and has
certain patents  issued or applications pending in various countries around the
world.   Eight U.S.  original patents and one reissue patent were issued by the
U.S. Patent  and Trademark Office during the 1998 fiscal year.  The Company has
48 patent  applications relating  to its  drug delivery technologies pending in
the United  States.   In addition,  the Company  has pending or expects to file
patent applications  corresponding to  most of  its  U.S.  patents  and  patent
applications in various countries around the world.

                                      -10-

  Although the  Company has  patents for some of its product candidates and has
applied for  additional patents, there can be no assurance that patents applied
for will  be granted, that patents granted to or acquired by the Company now or
in the  future will  be valid  and enforceable  and provide  the  Company  with
meaningful protection  from competition  or that  the Company  will possess the
financial resources  necessary to enforce any of its patents. There can also be
no assurance  that any  products developed  by the Company (or a licensee) will
not infringe  upon any  patent or  other intellectual property right of a third
party.

  The  Company   also  relies  upon  trade  secrets,  know-how  and  continuing
technological advances  to develop  and maintain  its competitive position.  To
maintain the  confidentiality of trade secrets and proprietary information, the
Company  maintains  a  policy  of  requiring  employees,  scientific  advisors,
consultants  and   collaborators  to   execute  confidentiality  and  invention
assignment agreements  upon commencement  of a  relationship with  the Company.
These agreements  are designed  both to  enable  the  Company  to  protect  its
proprietary information  by controlling the disclosure and use of technology to
which it  has rights and to provide for ownership in the Company of proprietary
technology developed  at the Company.  There can be no assurance, however, that
these agreements  will provide  meaningful protection  for the  Company's trade
secrets in the event of unauthorized use or disclosure of such information.


Manufacturing

  An important  step  in  taking  a  pharmaceutical  product  from  preclinical
research to  the marketplace  is scaling  up the  process required  to  produce
commercial quantities.  This  process  frequently  entails  custom  design  and
engineering that can add significantly to the costs of goods.

  The primary  raw materials  used  in  making  the  carriers  currently  under
consideration by the Company for its new formulations are non-alpha amino acids
and other  organic compounds.  The Company currently produces these carriers in
batch sizes  of up to two hundred grams. The Company has no internal capability
for the  production of  any of  these carriers  in larger batch sizes. A third-
party manufacturer  whose facility  complies with the FDA's GMP regulations was
recently successful  in scaling  up production of the Company's carrier for its
heparin Phase I clinical trial.

  The Company is conducting feasibility studies for engineering and location of
its own  manufacturing facility.   The Company believes that there are multiple
sources for the raw materials used to synthesize its carriers.  The Company has
identified numerous  commercial manufacturers meeting the FDA's GMP regulations
that have the capability of producing the Company's carriers.  The Company will
continue to  manufacture carriers  on a  small scale  for research purposes and
contract  out  with  third-party  producers  for  clinical  testing.  Once  the
engineering studies  for the  Company's production  facility are completed, the
Company would  be in  a position  to decide whether to make or buy the carriers
for future needs.


Competition

  Based on  the  preliminary  results  obtained  with  Emisphere's  proprietary
carriers in its oral heparin Phase I clinical trials, the Company believes that
it has  developed a strong competitive position with respect to the development
of a  new oral  anticoagulant/antithrombotic. Drug  delivery, biotechnology and
pharmaceutical science  are evolving  fields in which developments are expected
to continue  at a  rapid pace.   The  Company's success  depends, in part, upon
maintaining  a   competitive  position  in  the  development  of  products  and
technologies in  its areas  of focus.  The Company is in competition with other
drug   delivery,   biotechnology   and   pharmaceutical   companies,   research
organizations, individual  scientists and  non-profit organizations  engaged in
the development  of alternative drug delivery technologies or new drug research
and testing,  as well as with entities developing new drugs which may be orally
active.  The Company is aware that a number of companies are seeking to develop
new products  and alternatives  to injectable drug delivery, including, but not
limited to,  intranasal delivery,  pulmonary systems,  transdermal systems  and
colonic absorption  systems.   The Company  also is  aware of  other  companies
currently engaged  in  the  development  and  commercialization  of  oral  drug
delivery technologies and enhanced injectable systems.  Many of these companies
and entities  have substantially greater research and development capabilities,
experience and  marketing, financial  and managerial  resources, and  represent
significant competition  for the  Company.   Acquisitions of  or investments in
competing biotechnology  companies  by  large  pharmaceutical  companies  could
enhance competitors'  financial, marketing and other resources.  In addition, a
number of  these competing  drug  delivery  and  biotechnology  companies  have
entered into  collaboration  or  other  agreements  with  large  pharmaceutical
companies  which   could  similarly   enhance  these   competitors'  resources.
Accordingly, the  Company's competitors  may succeed  in  developing  competing
technologies and obtaining governmental approval for products more rapidly than
the Company.   There  can be  no assurance that developments by others will not
render the  Company's product  candidates or  the therapeutic compounds used in
combination with the Company's product candidates noncompetitive or obsolete.

                                      -11-

Government Regulation

  The Company's  operations and  products  under  development  are  subject  to
extensive regulation  by the  FDA and  other governmental  authorities  in  the
United States and other governmental authorities in other countries.

  The  duration   of  the  governmental  approval  process  for  marketing  new
pharmaceutical substances,  from the commencement of preclinical testing to the
receipt of  a governmental  final  letter  of  approval  for  marketing  a  new
substance, varies  with the nature of the product and with the country in which
such approval  is sought.   For  entirely new drugs, the approval process could
take eight to ten years or more; however, for reformulations of existing drugs,
the process  is typically  shorter.  In either case, the procedures required to
obtain governmental  approval to market new drug products is a costly and time-
consuming process  requiring rigorous  testing of  the new drug product.  There
can be  no assurance  that even  after such  time and  expenditures, regulatory
approval will be obtained for any products developed by the Company.

  The steps  required before a new human pharmaceutical product can be marketed
or shipped  commercially in  the United  States include,  in part,  preclinical
testing, the  filing of  an IND,  the conduct of clinical trials and the filing
with the  FDA of  either a  New Drug Application ("NDA") for drugs or a Product
License Application ("PLA") for biologics.

  In order  to conduct the clinical investigations necessary to obtain eventual
regulatory approval,  an applicant  must file an IND with the FDA to permit the
shipment and use of the drug for investigational purposes.  The IND sets forth,
in part,  the results  of preclinical  (laboratory and  animal) toxicology  and
efficacy testing  and the  applicant's plans  for clinical (human) testing.  If
the FDA  does not  deny the  exemption to ship or use the investigative drug or
place a "hold" on clinical testing within 30 days of the submission of the IND,
it becomes effective and clinical testing may begin.

  Under the  FDA's regulations,  the  clinical  testing  program  required  for
marketing approval  of a new drug typically involves three clinical phases.  In
Phase I,  safety studies  are generally  conducted  on  normal,  healthy  human
volunteers to  determine the  maximum dosages  and side effects associated with
increasing doses  of the  substance being  tested.   In Phase  II, studies  are
conducted on small groups of patients afflicted with a specific disease to gain
preliminary evidence  of efficacy  and to  determine the common short-term side
effects and  risks associated  with the  substance being  tested.    Phase  III
involves large-scale studies conducted on disease-afflicted patients to provide
statistical evidence  of efficacy  and safety  and to provide an adequate basis
for physician  labeling.   Frequent reports  are required in each phase and, if
unwarranted hazards  to patients are found, the FDA may request modification or
discontinuance of  clinical testing  until further studies have been conducted.
Phase IV  testing is  conducted either  to meet FDA requirements for additional
information as  a condition  of approval  or to expand market acceptance of the
pharmaceutical product.

  Once clinical  testing has  been completed  pursuant to an IND, the applicant
files an  NDA or  PLA with  the FDA  seeking approval  for marketing  the  drug
product.   The FDA  reviews the NDA or PLA to determine if the drug is safe and
effective, and  adequately labeled, and if the applicant can demonstrate proper
and consistent manufacture of the drug.  The time required for FDA action on an
NDA or  PLA varies  considerably, depending on the characteristics of the drug,
whether the  FDA needs  more information than is originally provided in the NDA
or PLA and whether the FDA finds problems with the evidence submitted.

  The facilities  of each  company involved  in the  manufacturing, processing,
testing, control  and labeling must be registered with and approved by the FDA.
Continued registration  requires  compliance  with  GMP  regulations.  The  FDA
conducts periodic  establishment inspections  to confirm  continued  compliance
with its regulations.

                                      -12-

  The Company  is also  subject to  various  federal,  state  and  local  laws,
regulations and  recommendations relating  to such  matters as  laboratory  and
manufacturing practices  and the  use, handling  and disposal  of hazardous  or
potentially hazardous substances used in connection with the Company's research
and development  work.   Although the Company believes it is in compliance with
these laws  and regulations in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental and other laws or regulations in the future.


Employees

  As of  July 31,  1998, the Company had 72 employees, 55 engaged in scientific
research and  technical functions and 17 performing administrative and clerical
functions.   Of the  72 employees,  21 hold Ph.D. or M.D. degrees.  The Company
believes that its relationship with its employees is good.


Directors and Officers

  Set forth  below is  certain information regarding the officers and directors
of the Company:

 Name                            Age   Position with the Company  
- -----------------------------    ---   ----------------------------
 Michael M. Goldberg, M.D.        39   Chairman  of  the  Board  of
                                       Directors     and      Chief
                                       Executive Officer

 Sam J. Milstein, Ph.D.           49   Director,  President,  Chief
                                       Scientific    Officer    and
                                       Secretary

 Robert A. Baughman, Jr.,         49   Senior    Vice    President,
   Pharm.D., Ph.D.                     Development

 Lewis H. Bender, M.B.A.          39   Senior    Vice    President,
                                       Business Development

 Barry B. Kanarek, M.D., Ph.D     51   Senior    Vice    President,
                                       Clinical Affairs  and  Chief
                                       Medical Officer

 Joseph D. Poveromo, C.P.A.       34   Controller     and     Chief
                                       Accounting Officer

 John E. Smart, Ph.D.             55   Vice President,  Director of
                                       Basic Research

 Shepard M. Goldberg, M.B.A.      43   Vice President, Operations

 Jere E. Goyan, Ph.D.             68   Director

 Mark I. Greene, M.D., Ph.D.      50   Director   and    scientific
                                       advisor

 Peter Barton Hutt, Esq.          63   Director

 Howard M. Pack                   80   Director

 Joseph R. Robinson, Ph.D.        59   Director   and    scientific
                                       advisor

 Robert J. Levenson               57   Director

                                      -13-

  Michael M.  Goldberg, M.D.  has served  as Chairman of the Board of Directors
since November  1991 and  as Chief  Executive Officer  and a  director  of  the
Company since  August 1990.  In addition, Dr. Goldberg served as President from
August 1990  to October  1995.   Dr.  Goldberg  received  a  B.S.  degree  from
Rensselaer Polytechnic  Institute and  an M.D.  from Albany  Medical College of
Union University in 1982 and an M.B.A. from Columbia University Graduate School
of Business in 1985.

  Sam J.  Milstein, Ph.D.  has been with the Company since September 1990, as a
director and  Chief Scientific  Officer since November 1991, as President since
October 1995,  as Secretary since December 1990 and as a Co-Director of Science
and of  Research and  Development prior  to November  1991.   In addition,  Dr.
Milstein served as Executive Vice President from November 1990 to October 1995.
Dr. Milstein  received a B.S. degree from The City College of New York in 1970,
an M.S.  in physical chemistry from the University of New Brunswick in 1975 and
a Ph.D. in biochemistry from New York University in 1980.

  Robert A.  Baughman, Jr.,  Pharm.D., Ph.D.  has been  with the  Company since
September 1991,  as Senior  Vice President  since September  1993, Director  of
Development since  June 1994  and Vice  President and  Director,  Research  and
Development of  the Company prior thereto.  Dr. Baughman received a B.S. degree
from Loyola  University in  1974, a Pharm.D. from the University of California,
San Francisco  in 1978  and  a  Ph.D.  in  pharmaceutical  chemistry  from  the
University of California, San Francisco in 1982.

  Lewis H.  Bender, M.B.A. has been with the Company since 1993, as Senior Vice
President of  Business Development since April 1997, Vice President of Business
Development since  October 1995  and as  Director of Business Development prior
thereto.   Mr. Bender  received a  B.S. degree  in 1981 and an M.S. in chemical
engineering in  1982 from the Massachusetts Institute of Technology, an M.A. in
international studies  from the  University of  Pennsylvania and an M.B.A. from
the University of Pennsylvania, Wharton School of Management in 1993.

  Barry B.  Kanarek, M.D.,  Ph.D. joined  the Company  in May  of 1998.  He was
previously Vice  President, Medical  Operations for  the Americas at ClinTrials
Research Inc.   Prior thereto he was with Glaxo Wellcome, most recently as Vice
President of  Medical Affairs,  where he  also served as acting head of Medical
Operations, sat  on the  U.S. site  Operating Committee, co-chaired the Product
Strategy committee  and acted  as Chief  Medical Officer during the integration
phase of  Glaxo Wellcome.  Dr. Kanarek received his M.D. and Ph.D. in 1977 from
the University of Salamanca in Spain.

  Joseph D.  Poveromo, C.P.A.,  the Company's  Controller and  Chief Accounting
Officer since  July of  1994, has  been with  the Company  since 1993.    Prior
thereto he  was Controller  of a  private pet  food  company  and  held  senior
accounting positions  with the  public accounting  firms of  Marshall Granger &
Company and Rayfield & Licata.  Mr. Poveromo received a B.B.A. degree in public
accounting from  Pace University in 1987 and was awarded his C.P.A. in February
1991.

  John E.  Smart, Ph.D.  joined the Company in 1996 as Vice President, Director
of Research  and has  been Director  of Basic Research since 1998.  He received
his Ph.D.  in biochemistry  and biophysics  from the  California  Institute  of
Technology and  has over  20 years  experience in  academia and the health care
industry.   He was  previously the  Vice  President  of  Research  at  Creative
Biomolecules, Inc. a biopharmaceutical company.

  Shepard M.  Goldberg, M.B.A.  has been  with the Company since April of 1998.
He was  previously President and owner of two regional distribution businesses.
He received  a B.S.  in electrical  engineering from Polytechnique Institute of
N.Y. and  an M.B.A. from Adelphi University.  Mr. Goldberg is a first cousin of
Michael M. Goldberg, M.D., Chairman and Chief Executive Officer of the Company.

                                      -14-

  Jere E. Goyan, Ph.D. is President, Chief Operating Officer, and a director of
Alteon, Inc.,  a development  stage pharmaceutical company, where he started as
Senior Vice  President Research and Development in January 1993.  Prior thereto
he was a Professor of Pharmacy and Pharmaceutical Chemistry and the Dean of the
School of  Pharmacy at  the University  of California,  San Francisco,  and has
served in  various  other  academic,  administrative  and  advisory  positions,
including that  of Commissioner  of the FDA.  He currently serves as a director
of  the   biopharmaceutical  companies   Atrix  Laboratories   Inc.,   SciClone
Pharmaceuticals and Boehringer Ingelheim.

  Mark I.  Greene, M.D.,  Ph.D. has  been  John  Eckman  Professor  of  Medical
Science, School of Medicine at the University of Pennsylvania for more than the
past five  years.   He currently  serves  as  a  director  of  Ribi  ImmunoChem
Research, Inc., a biopharmaceutical company.

  Peter Barton  Hutt, Esq. has for more than the past five years been a partner
of the  law  firm  of  Covington  &  Burling  in  Washington,  D.C.,  where  he
specializes in  the practice  of food  and drug  law.  He currently serves as a
director of  the biopharmaceutical  companies Interneuron Pharmaceuticals, Inc.
and Sparta Pharmaceuticals, Inc.

  Howard M. Pack has served as a director of the Company since its inception in
April 1985 and served as Executive Vice President of Finance from the Company's
inception until October 1988.

  Joseph R. Robinson, Ph.D. has been Professor of Pharmacy and Ophthalmology at
the University  of Wisconsin  for more  than the past five years.  He currently
serves as a director of Cima Laboratories, Inc., a pharmaceutical company.

  Robert  J.   Levenson  has  been  Executive  Vice  President  of  First  Data
Corporation for more than the past five years.  He previously held positions as
Senior  Executive   Vice  President   and  Chief  Operating  officer  of  Medco
Containment Services, Inc. and as Group President of Automatic Data Processing,
Inc.   He currently  serves as  a director  of First Data Corporation, Superior
Telecom Inc. and Vestcom International, Inc.


Scientific Advisors

  The Company's  scientific advisors  consult with  the Company on developments
relating to  current and  future forms  of drug delivery technology, chemistry,
gastro-intestinal physiology and protein structure.  As a group, the scientific
advisors possess substantial experience in biomaterials, controlled release and
polymeric delivery  systems, proteins, pharmaceutics, analytical techniques and
immunology.   The scientific  advisors also consult with the Company on aspects
of drug  delivery product  planning and  feasibility studies and assist Company
scientists in  establishing  research  priorities,  provide  guidance  for  the
Company's clinical  evaluation  programs,  advise  Company  scientists  of  new
developments and alert the Company to potential collaborators. In addition, the
Company has  funded various  research projects and collaborations with a number
of its  scientific advisors and it intends to continue to expand its scientific
collaborations with  current and  future scientific  advisors.    None  of  the
scientific advisors  are employees  of the Company.  Scientific advisors devote
only a small portion of their time to the affairs of the Company and have other
commitments to,  or consulting  or advisory  contracts with, other institutions
which may  compete with their obligations to the Company.  The Company requires
each of its scientific advisors to execute a confidentiality agreement upon the
commencement of  his or  her relationship  with the  Company.   The  agreements
generally  provide   that  all  confidential  information  made  known  to  the
individual during  the term of the relationship shall be the exclusive property
of the  Company and  shall be  kept confidential  and not  disclosed  to  third
parties except  in specified circumstances.  Scientific advisors receive annual
compensation, are  reimbursed for  their expenses for each meeting attended and
are granted  stock options  on a  case-by-case basis.  Drs. Greene and Robinson
also serve as directors of the Company.

                                      -15-

  Set forth  below are  the names,  positions and  areas of  expertise  of  the
Company's scientific advisors.

 Name and Position                     Area of Expertise
 -----------------------------------   -----------------------------
 Mark I. Greene, M.D., Ph.D.           Immunology, computer modeling
  Professor of Medicine,
  Department of Pathology,
  School of Medicine
  University of Pennsylvania

 Joseph R. Robinson, Ph.D.             Mucoadhesives, pharmaceutics
  Professor, School of Pharmacy        and gastrointestinal
  University of Wisconsin              physiology

 Ernesto Freire, Ph.D.                 Protein chemistry, analytical
  Professor                            techniques and calorimetry,
  Johns Hopkins University             computer modeling

 Garret FitzGerald, M.D.               Anticoagulants and
  Robinette Professor of               antithrombotics and clinical
  Cardiovascular Medicine, Director,   research
  Center for Experimental
  Therapeutics
  Director, Clinical Research Center
  University of Pennsylvania

 Scott Berkowitz, M.D                  Disorders of hemostasis and
  Associate Clinical Professor of      thrombosis; clinical trial
  Medicine                             design
  Duke University

 Elazer Edelman, M.D. Ph.D             Indicators for
  Director                             anticoagulant/antithrombotic
  Harvard-MIT Biomedical Engineering   therapy
  Center

 Robert Linhardt, Ph.D.                Structure, activity, analysis
  Professor                            and synthesis of complex
  College of Pharmacy                  carbohydrates
  University of Iowa                   

 Sam Money, M.D.                       Indicators for nonclinical
  Head of Vascular Surgery             antithrombotic modeling
  Ochsner Clinic


ITEM 2. PROPERTIES

  The registrant currently leases 66,600 square feet of office space at 765 Old
Saw Mill  River Road,  Tarrytown, New  York for  use as  executive offices  and
laboratories.   No difficulty  is anticipated  in negotiating  renewals as  the
current leases  expire or in finding satisfactory space at a reasonable cost if
the existing  space becomes  unavailable or  additional space is needed to meet
expansion requirements.


ITEM 3. LEGAL PROCEEDINGS

  The Company  is not  party to  any litigation  that is  expected  to  have  a
material effect on the operations or business of the Company.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  None.

                                      -16-

                                    PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's  Common Stock  is traded  on the  over-the-counter  market  and
prices are quoted on the Nasdaq National Market system under the symbol EMIS.

  The following sets forth the range of high and low sale prices for the Common
Stock for the periods indicated, as reported by Nasdaq.

     Fiscal Year Ended July 31,     High      Low  
     ---------------------------   -------   ------

     1997
      First quarter.............   17 7/8     7 3/8
      Second quarter............   25 1/2    12 3/4
      Third quarter.............   27 1/2    13 1/8
      Fourth quarter............   24 1/2    14 1/2

     1998
      First quarter.............   24        15 3/8
      Second quarter............   22 5/16   14 3/4
      Third quarter.............   21        15 1/2
      Fourth quarter............   17 5/8    10

  As of  October 21,  1998 there were 294 stockholders of record and 10,999,740
shares of Common Stock outstanding.  The closing price for the Company's Common
Stock on October 21, 1998 was $7.50.

  The Company  has never  paid cash  dividends and  does not intend to pay cash
dividends in  the foreseeable  future.  The Company intends to retain earnings,
if any, to finance the growth of its business.

                                      -17-

ITEM 6. SELECTED FINANCIAL DATA

         The following  selected financial  data for  the five years ended July
31, 1998  have been  derived from  the financial  statements of the Company and
notes thereto,  which have been audited by independent accountants.  There were
no dividends  declared or  paid by the Company during the five years ended July
31, 1998.

Fiscal Year Ended July 31, ------------------------------------------------- 1994 1995 1996 1997 1998 --------- -------- -------- -------- -------- (in thousands, except per share amounts) Statement of Operations Data: Contract research revenue $ 85 $ 33 $ 3,131 $ 5,401 $15,868 --------- -------- -------- -------- -------- Costs and expenses: Research and development 5,855 5,802 6,605 7,724 15,190 Loss in Ebbisham Ltd. - - - 2,550 4,044 General and administrative 2,619 2,404 3,337 3,416 5,344 --------- -------- -------- -------- -------- Total costs and expenses 8,474 8,206 9,942 13,690 24,578 --------- -------- -------- -------- -------- Operating loss (8,389) (8,173) (6,811) (8,289) (8,710) Other income and expense 698 389 703 968 1,644 --------- -------- -------- -------- -------- Net loss $(7,691) $(7,784) $(6,108) $(7,321) $(7,066) ========= ======== ======== ======== ======== Net loss per share-Basic and diluted $(1.01) $(1.03) $(0.72) $(0.77) $(0.66) ======= ======= ======= ======= ======= As of July 31, ------------------------------------------------- 1994 1995 1996 1997 1998 --------- -------- -------- -------- -------- Balance Sheet Data: (in thousands) Cash, cash equivalents and marketable securities $ 12,694 $ 5,620 $ 18,237 $ 33,690 $ 34,828 Working capital 12,597 5,173 17,799 31,323 31,457 Total assets 15,210 7,549 20,039 36,897 53,690 Long-term liabilities 87 55 45 35 10,598 Accumulated deficit (28,844) (36,628) (42,736) (50,057) (57,123) Stockholders' equity 14,674 6,899 19,267 33,398 31,281
-18- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Emisphere is a drug delivery company focused on the discovery and application of proprietary synthetic chemical compounds that enable the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. Since its inception in 1986, the Company has devoted substantially all of its efforts and resources to research and development conducted on its own behalf and through collaborations with corporate partners and academic research institutions. The Company has no product sales to date. The major sources of the Company's working capital has been proceeds from its initial public offering in 1989, a second public offering in 1993, a third public offering in 1997, private equity financing, issuance to an affiliate of Elan Corporation plc of stock and warrants in 1995 and subsequent exercise of the warrants in April 1998, reimbursement of expenses and other payments from corporate partners, the registered sale of one million shares of common stock to two institutional investors in 1996, the issuance on May 1, 1998 of three year, $13,500,000 aggregate principal, 5% senior convertible notes, and income earned on the investment of available funds. The Company's operations are not significantly affected by inflation or seasonality. In December 1997, the Company and Novartis Pharma AG ("Novartis") entered into a research collaboration to investigate the Company's technology for oral delivery of two selected Novartis compounds. The agreement with Novartis provides for an initial research collaboration period of at least 12 months and the option on the part of Novartis to acquire an exclusive license to use the Company's technologies for the development and commercialization of an oral formulation of the Novartis compounds. In March 1998, Eli Lilly & Co. ("Lilly") and Emisphere executed two license agreements granting Lilly the right to use Emisphere's technologies in connection with the oral formulation of two of Lilly's therapeutic proteins ( the "subject proteins") in the areas of osteoporosis and endocrinology including growth disorders. As a result, Lilly made two milestone payments to Emisphere. The license agreements provide that Lilly is obligated to seek to market the oral formulations of the subject proteins and that Emisphere is obligated to provide a material portion of the supply of carrier necessary for the production of any such formulation. In May 1998, Emisphere initiated on behalf of Ebbisham Limited ("Ebbisham"), a joint venture between Emisphere and Elan Corporation plc, a Phase II clinical trial for Ebbisham's oral heparin product. Prior to initiating the Phase II trial, Emisphere had completed six single dosings and two multiple dosing Phase I trials. The Phase I trials demonstrated that the oral heparin was well-tolerated and retained the properties observed in the pre clinical models. The Phase II trial was designed with three arms of approximately forty patients each who have undergone surgery for hip replacement. Two different doses of the oral heparin formulation will be compared to subcutaneously administered heparin. The objective of the study is to demonstrate that orally administered heparin utilizing Emisphere's proprietary technology is well-tolerated and comparable to subcutaneous heparin in preventing deep venous thrombosis. The results of the Phase II trial are expected sometime before January 31, 1999. Results of Operations The Company has since its inception generated significant losses from operations. The Company does not expect to achieve profitability in the foreseeable future. Profitability will ultimately depend on the Company's ability to develop its lead products in conjunction with Ebbisham, Lilly, and Novartis, or to develop other products in conjunction with other partners. There can be no assurance that the development will be completed or if completed, any regulatory agency will approve the final product. Even if final products are developed and approved, there is no assurance that sales will be sufficient to achieve profitability. If development of such products is not achieved or approval not granted, the Company's prospects will be materially affected. -19- The ability of the Company to reduce its operating losses in the near term will be dependent upon, among other things, its ability to attract new pharmaceutical and other companies who are willing to provide funding to the Company for a portion of the Company's research and development with respect to specific projects. While the Company is constantly engaged in discussions with pharmaceutical and other companies, there can be no assurance that the Company will enter into any additional agreements or that the agreements will provided research and development revenues to the Company. Fiscal 1998 Compared to Fiscal 1997 The Company's contract research revenues increased to $15.9 million in fiscal 1998 from $5.4 million in fiscal 1997. Such increase was the result of the Company performing additional services on behalf of its collaborators. Revenues in fiscal 1998 consisted of recognition of $7,061,000 from Ebbisham, $6,560,000 from Lilly and $2,250,000 from Novartis. Total operating expenses for the fiscal year ended July 31, 1998 increased by $10,888,000, or 80%, as compared to fiscal 1997. The details of the increase are as follows: Research and development costs increased by approximately $7,466,000, or 97%, in fiscal 1998 as compared to fiscal 1997. This increase is mainly attributable to increased personnel and laboratory supply costs in connection with the collaborations with Lilly, Novartis and the ongoing clinical work for heparin. The Company also experienced an increase in funding of outside consultants and universities engaged to conduct studies to help advance the Company's scientific research efforts, perform services related to the manufacturing of the Company's carriers, and consult on the Company's ongoing clinical studies with heparin. The Company also experienced an increase in rent expense in connection with payments for a new lease for laboratory space. The Company believes that this level of research and development spending will continue for the foreseeable future and may increase if operations are expanded. The loss in Ebbisham, increased by approximately $1,494,000, or 59%, in fiscal 1998 as compared to fiscal 1997. This increase is attributable to increased costs associated with ongoing clinical development of heparin. The costs associated with Ebbisham may increase substantially depending upon the agreed timing and scope of future research and development efforts. General and administrative expenses increased by approximately $1,929,000, or 56 %, in fiscal 1998 as compared to fiscal 1997. This increase is primarily the result of outside consulting costs associated with an ongoing information technology project the Company has undertaken. The Company also experienced an increase in rent expense in connection with payments for a new lease for administrative office space and an increase in personnel and related expenses associated with an increase in administrative staff positions. This was partially offset by a decrease in legal and professional fees paid in connection with the finalization of the Ebbisham joint venture and the agreement with Lilly during fiscal 1997. In connection with the relocation of its operations, the Company incurred a charge of approximately $300,000 which represented the write-down of leasehold improvements on its old facility. The Company recorded expenses of approximately $295,000 in connection with the granting of options as compensation to business consultants in the fiscal year 1998 compared to $250,000 in fiscal 1997. As a result of these factors, the Company's operating loss increased by $421,000, or 5%, from fiscal 1997 to fiscal 1998. The Company does not expect to generate an operating profit, and may possibly generate larger losses, in the foreseeable future. The Company's other income and expense for the fiscal year 1998 increased by approximately $676,000, or 70%, from fiscal 1997. This was primarily the result of increased returns on the Company's larger investment portfolio. This increase was partially offset by interest expense which the Company accrued on the $13,500,000, 5% senior convertible notes due May 1, 2001. -20- Based on the above factors, the Company sustained a net loss for fiscal 1998 of $7,066,000, a 3% decrease over the fiscal 1997 loss of $7,321,000. Fiscal 1997 Compared to Fiscal 1996 Revenues increased by approximately $2,270,000. The majority of the 1997 increase in contract research revenues was attributable to increased revenues from Ebbisham of $4.0 million as the Company provided additional services to the joint venture. The Company also recognized contract revenues from Lilly, and from two pharmaceutical companies for which the Company performed feasibility studies. Total operating expenses for the fiscal year ended July 31, 1997 increased by $3,748,000, or 38%, as compared to fiscal 1996. The details of the increase are as follows: Research and development costs increased by approximately $1,119,000, or 17%, in fiscal 1997 as compared to fiscal 1996. This increase is mainly attributable to increased personnel and related expenses associated with the Company's development of an oral heparin formulation and work performed in connection with Lilly. The Company also experienced an increase in funding of outside consultants and universities engaged to conduct studies to help advance the Company's scientific research efforts. The increase of $2,550,000 in the loss in Ebbisham represents the Company's pro-rata portion of Ebbisham's loss for the period. No loss was experienced in the comparable period as the venture did not commence operations until September 1996. General and administrative expenses increased by approximately $79,000, or 2%, in fiscal 1997 as compared to fiscal 1996. This increase is primarily attributable to an increase in legal and professional fees incurred in connection with the finalization of the Ebbisham joint venture and the agreement with Lilly. The Company also experienced an increase in personnel and related expenses. The increase was partially offset by a decrease in expenses relating to services provided by outside consultants. The Company recorded expenses of approximately $250,000 in connection with the granting of options as compensation to business consultants in the fiscal year 1997 compared to $730,000 in fiscal 1996. As a result of these factors, the Company's operating loss increased by 1,478,000 or 22%, from fiscal 1996 to fiscal 1997. The Company's investment income for fiscal 1997 increased by approximately $264,000, or 38%, from fiscal 1996. This was primarily due to a larger investment portfolio. Based on the above factors, the Company sustained a net loss for fiscal 1997 of $7,321,000, a 20% increase over fiscal 1996 loss of $6,108,000. Liquidity and Capital Resources As of July 31, 1998 the Company had working capital of approximately $31,457,000. Total cash, cash equivalents and marketable securities were approximately $34,828,000, an increase of $1,138,000 compared to the Company's position at July 31, 1997. The increase in the Company's cash, cash equivalents and marketable securities was primarily due to receipt of $13,500,000 in proceeds from senior convertible notes and $4,673,000 from the exercise of warrants and options partially offset by cash used to fund capital expenditures of $8.6 million and fiscal 1998 operations of $8.4 million. -21- The Company expects to continue to incur substantial research and development expenses associated with the development of the Company's oral drug delivery system. As a result of the ongoing research and development efforts of the Company, management believes that the Company will continue to incur operating losses and that, potentially, such losses could increase. The Company expects to need substantial resources to continue its research and development efforts. In addition, the Company is obligated to fund one-half of Ebbisham's future cash needs upon the venture's request. The Company anticipates funding requirements to initially be $5,000,000 and, depending upon the agreed timing and scope of the future research and development efforts, may be an additional $8,000,000 over the next twelve months. In August 1998, the Company loaned Ebbisham Ltd. $ 5,000,000 to cover past costs incurred by Ebbisham Ltd. The Company expects the research funding received from Lilly and Novartis to approximate the costs to be incurred by the Company in connection with the development of each of the Company's projects. (See "Collaboration Agreements") Under present operating assumptions, the Company expects that cash, cash equivalents and marketable securities will be adequate to meet its liquidity and capital requirements through fiscal 2000. Thereafter, the Company would need to seek additional funds, primarily in the public and private equity markets and, to the extent necessary and available, through debt financing. The Company has no firm agreements with respect to any additional financing and there can be no assurance that the Company would be able to obtain adequate funds on acceptable terms. If adequate funds were not available, the Company would be required to delay, scale back , or eliminate one or more of its research and development programs, or obtain funds, if available, through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish. The Company does not maintain any credit lines with financial institutions. Year 2000 Compliance The "Year 2000" problem relates to many currently installed computers, software, and other equipment that relies on embedded technology (collectively, "Business systems"). These Business systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in less than two years, Business systems used by many companies, in a very wide variety of applications, will experience operating difficulties unless they are modified, upgraded, or replaced to adequately process information involving, related to or dependent upon the century change. If a Business system used by the Company or a third party dealing with the Company fails because of the inability of the Business system to properly read a 21st century date, the results could have a material adverse effect on the Company. The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 Business systems failures and has established a team to address Year 2000 risk. The team is reviewing the Company' internal infrastructure and believes that it has identified substantially all of the major Business systems used in connection with its internal operations. The Company has commenced the process of identifying and correcting the major Business systems that may need to be modified, upgraded, or replaced, and expects to complete this process, along with remedial actions before the end of fiscal 1999. Costs incurred to date to correct Year 2000 problems have been immaterial. The Company estimates the total cost to complete any required modifications, upgrades, or replacements of affected Business systems will not have a material impact on the Company's business or results of operations. This estimate is being monitored and will be revised, if necessary, as additional information becomes available. The Company also recognizes the risk that suppliers of products, services, and collaborators with whom the Company transacts business on a worldwide basis may not comply with Year 2000 requirements. The Company has initiated formal communications with significant suppliers and collaborators to determine the extent to which the Company is vulnerable if these third parties fail to remediate their own Year 2000 issues. The review is ongoing and the Company is unable to determine, at this time, the probability that any material supplier or collaborator will not be able to correct any Year 2000 problem in a timely manner. In the event any such third parties cannot provide the Company with products, services, or continue the collaborations with the Company, the Company's results of operations could be materially adversely affected. Based on the above, the Company has yet to develop a comprehensive contingency plan with respect to the Year 2000 problem. The Company will continue to monitor its own Business systems and, to the extent possible, evaluate the Business systems of its third party suppliers and collaborators to ensure progress on this critical matter. However, if the Company identifies significant risk related to the Year 2000 compliance or progress deviates from anticipated timelines, the Company will develop contingency plans as deemed necessary at that time. -22- THE DISCUSSION OF THE COMPANY'S EFFORTS, ESTIMATES, AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENTS BEST ESTIMATES OF FUTURE EVENTS. THE COMPANY'S ABILITY TO ACHIEVE YEAR 2000 COMPLIANCE AND THE LEVEL OF INCREMENTAL COSTS ASSOCIATED THEREWITH, COULD BE ADVERSELY IMPACTED BY, AMONG OTHER THINGS, THE AVAILABILITY AND COST OF MODIFICATIONS, OUR ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 PROBLEM, AND UNANTICIPATED PROBLEMS IDENTIFIED IN THE ONGOING COMPLIANCE REVIEW. Impact of the Future Adoption of Recently Issued Accounting Standards The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") in June of 1997. Comprehensive income represents the change in net assets of a business enterprise as a result of nonowner transactions. Management does not believe that the future adoption of "SFAS 130" will have a material effect on the Company's financial position or results of operations. The Company will adopt "SFAS No. 130" for the year ending July 31, 1999. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that a business enterprise report certain information about operation segments, products and services, geographic areas of operation, and major customers in complete sets of financial statements and in condensed financial statements for interim periods. Management does not believe that the future adoption of SFAS No. 131 will have a material effect on the Company's financial statements. The Company is required to adopt this standard for the year ending July 31, 1999. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement modifies financial statement disclosures related to pension and other postretirement plans, and therefore will not have an effect on the Company's financial position or results of operations, and is effective for periods beginning after December 15, 1997. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a comprehensive standard on accounting for derivatives and hedging activities, and is effective for periods beginning after June 15, 1999. Management does not believe that the future adoption of SFAS No. 133 will have a material effect on the Company's financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At July 31, 1998, the Company did not hold any market risk sensitive instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are set forth starting on page F-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 1, 1998 Emisphere Technologies, Inc. (the "Company") engaged PricewaterhouseCoopers LLP as the independent accountants to audit the financial statements of Ebbisham Limited ("Ebbisham"), the joint venture company owned equally by the Company and Elan Corporation plc. PricewaterhouseCoopers LLP has served as the Company's auditors since November of 1991. KPMG, Ebbisham's independent chartered accountants upon whose opinion PricewaterhouseCoopers LLP relied for the period from the commencement of its operations on September 26, 1996 to July 31, 1997, will continue as Ebbisham's independent chartered accountants but has been dismissed by the Company with respect to an opinion upon which PricewaterhouseCoopers LLP will rely for the fiscal year ended July 31, 1998. -23- Neither PricewaterhouseCoopers LLP's report on the Company's financial statements for the 1996 and 1997 fiscal years nor KPMG's report on Ebbisham for the period from the commencement of its operations to July 31, 1997 contained an adverse opinion or disclaimer of opinion and neither report was qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's 1996 and 1997 fiscal years and the subsequent period preceding the dismissal of KPMG, there were neither (i) disagreements with KPMG on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter thereof in connection with its report nor (ii) any of the reportable events listed in paragraphs (a)(1)(v)(A) through (D) of Item 304 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. Prior to the engagement of PricewaterhouseCoopers LLP as the independent accountant to audit Ebbisham's financial statements, neither the Company nor Ebbisham consulted with PricewaterhouseCoopers LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements. The Company's decision to change accountants with respect to the audit of Ebbisham's financial statements was not recommended or approved by the audit committee of the Company's Board of Directors. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the Company's executive officers is contained in Part I hereof. All other information required by this Item is incorporated herein by reference to the Company's definitive proxy statement to be filed no later than November 28, 1998 (the "1998 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) A list of the financial statements and financial statement schedules filed as a part of this report is set forth on page F-1 hereof. A list of the exhibits filed as a part of this report is set forth in the Exhibit Index starting on page 26 hereof. (b) Reports on Form 8-K During the last quarter of the period covered by this report, the registrant filed a Current Report on Form 8-K dated May 1, 1998 reporting Item 5 Other Events and including no financial statements. -24- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMISPHERE TECHNOLOGIES, INC. Date: October 28, 1998 by: /s/ Michael M. Goldberg ---------------------------- Michael M. Goldberg, M.D. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Michael M. Goldberg Director, Chairman of the Board, October 28, 1998 - ------------------------- President and Chief Executive Michael M. Goldberg, M.D. Officer Director October 28, 1998 - ------------------------- Jere E. Goyan, Ph.D. /s/ Peter Barton Hutt Director October 28, 1998 - ------------------------- Peter Barton Hutt /s/ Sam J. Milstein Director, Executive Vice October 28, 1998 - ------------------------- President, Chief Scientific Sam J. Milstein, Ph.D. Officer and Secretary /s/ Howard M. Pack Director October 28, 1998 - ------------------------- Howard M. Pack /s/ Mark I. Greene Director October 28, 1998 - ------------------------- Mark I. Greene, M.D., Ph.D. /s/ Joseph R. Robinson Director October 28, 1998 - ------------------------- Joseph R. Robinson, Ph.D. /s/ Robert J. Levenson Director October 28, 1998 - ------------------------- Robert J. Levenson /s/ Joseph D. Poveromo Controller and Chief Accounting October 28, 1998 - ------------------------- Officer (Principal Financial and Joseph D. Poveromo Accounting Officer) -25- EMISPHERE TECHNOLOGIES, INC. FINANCIAL STATEMENTS Index Page(s) ------- Emisphere Technologies, Inc. - ---------------------------- Report of Independent Accountants F-2 Financial Statements: Balance Sheets as of July 31, 1997 and 1998 F-3 Statements of Operations for the years ended July 31, 1996, 1997 and 1998 F-4 Statements of Stockholders' Equity for the year ended July 31, 1996, 1997 and 1998 F-5 Statements of Cash Flows for the years ended July 31, 1996, 1997 and 1998 F-6 Notes to Financial Statements F-7 - F-24 Ebbisham Limited - ---------------- Report of Independent Accountants F-25 Financial Statements: Balance Sheets as of July 31, 1997 and 1998 F-26 Statements of Operations for the period from September 26, 1996 (inception) to July 31, 1997, the year ended July 31, 1998 and the cumulative period from September 26, 1996 (inception) to July 31, 1998 F-27 Statements of Stockholders' Deficit for the cumulative period from September 26, 1996 (inception) to July 31, 1998 including the period from September 26, 1996 (inception) to July 31, 1997 and the year ended July 31, 1998 F-28 Statements of Cash Flows for the period from September 26, 1996 (inception) to July 31, 1997, the year ended July 31, 1998 and the cumulative period from September 26, 1996 (inception) to July 31, 1998 F-29 Notes to Financial Statements F-30 - F-32 F-1 Report of Independent Accountants New York, New York October 12 , 1998 To the Board of Directors and Stockholders of Emisphere Technologies, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of EMISPHERE TECHNOLOGIES, INC. (the "Company") at July 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP F-2 EMISPHERE TECHNOLOGIES, INC. Balance Sheets July 31, 1997 and 1998 1997 1998 ------------- ------------- ASSETS: Current assets: Cash and cash equivalents $ 22,398,967 $ 21,358,308 Marketable securities 11,291,255 13,469,733 Receivable due from Ebbisham Ltd. 648,786 7,710,056 Prepaid expenses and other current assets 448,114 729,587 ------------- ------------- Total current assets 34,787,122 43,267,684 Equipment and leasehold improvements, at cost, net of accumulated depreciation and amortization 2,046,087 9,619,856 Deferred finance costs, net of accumulated amortization of $67,500 742,500 Other assets 64,243 59,970 ------------- ------------- Total assets $ 36,897,452 $ 53,690,010 ============= ============= LIABILITIES and STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 254,715 $ 724,848 Accrued compensation 215,000 266,000 Accrued professional fees 288,000 203,000 Accrued interest 168,750 Accrued expenses 166,858 364,483 Senior convertible notes, current portion 3,500,000 Investment deficiency in Ebbisham Ltd. 2,539,958 6,583,670 ------------- ------------- Total current liabilities 3,464,531 11,810,751 Senior convertible notes 10,000,000 Deferred lease liability 34,542 598,111 ------------- ------------- Total liabilities 3,499,073 22,408,862 ------------- ------------- Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued and outstanding Common stock, $.01 par value; 20,000,000 shares authorized; 10,733,877 shares issued (10,690,377 outstanding) in 1997; 11,037,238 shares issued (10,993,738 outstanding) in 1998 107,339 110,372 Additional paid-in capital 83,516,461 88,481,742 Accumulated deficit (50,057,115) (57,123,403) Net unrealized gain on marketable securities 24,507 5,250 ------------- ------------- 33,591,192 31,473,961 Less, common stock held in treasury, at cost; 43,500 shares in 1997 and 1998 (192,813) (192,813) ------------- ------------- Total stockholders' equity 33,398,379 31,281,148 ------------- ------------- Total liabilities and stockholders' equity $ 36,897,452 $ 53,690,010 ============= ============= The accompanying notes are an integral part of the financial statements. F-3 EMISPHERE TECHNOLOGIES, INC. Statements of Operations For the years ended July 31, 1996, 1997 and 1998 1996 1997 1998 ------------- ------------- ------------- Contract research revenues $ 3,130,893 $ 5,400,880 $ 15,868,310 ------------- ------------- ------------- Costs and expenses: Research and development 6,605,031 7,723,995 15,189,811 Loss in Ebbisham Ltd. 2,549,956 4,043,712 General and administrative expenses 3,336,910 3,416,061 5,344,665 ------------- ------------- ------------- 9,941,941 13,690,012 24,578,188 ------------- ------------- ------------- Operating loss (6,811,048) (8,289,132) (8,709,878) ------------- ------------- ------------- Other income and expense: Investment income 703,447 967,827 1,879,840 Interest expense (236,250) ------------- ------------- ------------- 703,447 967,827 1,643,590 ------------- ------------- ------------- Net loss $ (6,107,601) $ (7,321,305) $ (7,066,288) ============= ============= ============= Net loss per share, basic and diluted $ (0.72) $ (0.77) $ (0.66) ======== ======== ======== The accompanying notes are an integral part of the financial statements. F-4 EMISPHERE TECHNOLOGIES, INC. Statements of Stockholders' Equity For the years ended July 31, 1996, 1997 and 1998
Net Unrealized Gain Common Stock Common Stock Additional (Loss) on Held in Treasury -------------------- Paid-in Accumulated Marketable ------------------ Shares Amount Capital Deficit Securities Shares Amount Total ---------- -------- ----------- ------------- ---------- ------ ---------- ------------ Balance, July 31, 1995 7,687,304 $ 76,873 $43,626,657 $(36,628,209) $ 16,191 43,500 $(192,813) $ 6,898,699 Sale of common stock under employee stock purchase plans and exercise of options 125,956 1,260 427,735 428,995 Issuance of common stock and warrants to Elan International Services Ltd., net of expenses 600,000 6,000 7,457,000 7,463,000 Issuance of common stock in connection with a public offering, net of expenses 1,000,000 10,000 9,888,456 9,898,456 Issuance of common stock and stock options in exchange for services rendered 37,500 375 729,313 729,688 Change in net unrealized gain (loss) on marketable securities (44,482) (44,482) Net loss (6,107,601) (6,107,601) ---------- -------- ----------- ------------- ---------- ------ ---------- ------------ Balance, July 31, 1996 9,450,760 94,508 62,129,161 (42,735,810) (28,291) 43,500 (192,813) 19,266,755 Sale of common stock under employee stock purchase plans and exercise of options 133,117 1,331 1,178,278 1,179,609 Issuance of common stock in connection with a public offering, net of expenses 1,150,000 11,500 19,959,022 19,970,522 Issuance of stock options in exchange for services rendered 250,000 250,000 Change in net unrealized gain (loss) on marketable securities 52,798 52,798 Net loss (7,321,305) (7,321,305) ---------- -------- ----------- ------------- ---------- ------ ---------- ------------ Balance, July 31, 1997 10,733,877 107,339 83,516,461 (50,057,115) 24,507 43,500 (192,813) 33,398,379 Sale of common stock under employee stock purchase plans and exercise of options 53,361 533 610,281 610,814 Exercise of warrants by Elan International Services Ltd. 250,000 2,500 4,060,000 4,062,500 Issuance of stock options in exchange for services rendered 295,000 295,000 Change in net unrealized gain (loss) on marketable securities (19,257) (19,257) Net loss (7,066,288) (7,066,288) ---------- -------- ----------- ------------- ---------- ------ ---------- ------------ Balance, July 31, 1998 11,037,238 $110,372 $88,481,742 $(57,123,403) $ 5,250 43,500 $(192,813) $31,281,148 ========== ======== =========== ============= ========== ====== ========== ============
The accompanying notes are an integral part of the financial statements. F-5 EMISPHERE TECHNOLOGIES, INC. Statements of Cash Flows For the years ended July 31, 1996, 1997 and 1998 Increase (Decrease) in Cash and Cash Equivalents
1996 1997 1998 ------------- ------------- ------------- Cash flows from operating activities: Net loss $ (6,107,601) $ (7,321,305) $ (7,066,288) ------------- ------------- ------------- Adjustments to reconcile net loss in net cash used in operating activities: Loss in Ebbisham Ltd. 2,549,956 4,043,712 Depreciation 571,485 441,768 953,615 Amortization of (premium) discount on marketable securities 13,440 Amortization of deferred financing costs 67,500 Writeoff of leasehold improvements 337,961 (Decrease) increase in deferred lease liability (10,277) (10,281) 563,569 Net realized gain on sale of marketable securities (25,562) (60) (14,123) Noncash compensation in connection with the issuance of equity securities 729,688 250,000 295,000 Changes in assets and liabilities: (Increase) in receivable due from Ebbisham Ltd. (648,786) (7,061,270) (Increase) in prepaid expenses and other current assets (141,300) (158,345) (281,473) (Increase) in deferred financing costs (810,000) (Increase) in investment in Ebbisham Ltd. (9,998) Decrease (increase) in other assets 5,000 (3,000) 4,273 Increase in accounts payable and accrued expenses 133,014 196,786 539,018 ------------- ------------- ------------- Total adjustments 1,262,048 2,608,040 (1,348,778) ------------- ------------- ------------- Net cash used in operating activities (4,845,553) (4,713,265) (8,415,066) ------------- ------------- ------------- Cash flows from investing activities: Capital expenditures (318,038) (1,036,993) (8,601,855) Purchases of marketable securities (14,701,266) (13,550,937) (14,938,128) Proceeds from sales of marketable securities 11,742,924 8,645,357 12,741,076 Other 10,000 ------------- ------------- ------------- Net cash used in investing activities (3,266,380) (5,942,573) (10,798,907) ------------- ------------- ------------- Cash flows from financing activities: Net proceeds from issuance of common stock and warrants to Elan International Services Ltd. 7,463,000 4,062,500 Net proceeds from issuance of common stock in a public offering 9,898,456 19,970,522 Proceeds from exercise of options and employee stock purchases 428,995 1,179,609 610,814 Proceeds from senior convertible notes 13,500,000 ------------- ------------- ------------- Net cash provided by Financing activities 17,790,451 21,150,131 18,173,314 ------------- ------------- ------------- Net increase in cash and cash equivalents 9,678,518 10,494,293 (1,040,659) Cash and cash equivalents, beginning of year 2,226,156 11,904,674 22,398,967 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 11,904,674 $ 22,398,967 $ 21,358,308 ============= ============= ============= Supplemental disclosure of noncash investing and financing activities: Capital expenditures in accounts payable $ 263,490
The accompanying notes are an integral part of the financial statements. F-6 Emisphere Technologies, Inc. Notes to Financial Statements 1. Organization and Business: Emisphere Technologies, Inc. (the "Company"), is developing a novel technology for the oral delivery of pharmaceuticals that are currently effectively administered only by injection. To date the Company has no product sales. The Company has limited capital resources and recurring net operating losses. The Company is dependent upon receipt of additional capital investment or other financing to fund its long-term planned research activities. Assuming that the Company can obtain sufficient financing to complete development of its oral drug delivery technology, the Company will need to attract pharmaceutical companies willing to enter into commercialization agreements with the Company to produce and market their drugs utilizing the Company's drug delivery technology. In the event the Company is unable to raise adequate funds, operations would be scaled back or discontinued. In addition to the normal risks associated with a new business venture, there can be no assurance that the Company's research and development will be successfully completed or that the Company's drug delivery technology will be commercially viable. In addition, the Company operates in an environment of rapid change in technology, and is dependent upon the services of its employees and its consultants. 2. Summary of Significant Accounting Policies: Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided for on the straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized over the life of the lease or of the improvements, whichever is shorter. Expenditures for maintenance and repairs which do not materially extend the useful lives of the respective assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts and any gain or loss is recognized in operations. Cash and Cash Equivalents The Company considers all highly liquid, interest-bearing, debt instruments which, when acquired, have a maturity of three months or less to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value (see Notes 3 and 7 for fair value of marketable securities and the 5% Senior Convertible Note). Patent Costs As a result of research and development efforts conducted by the Company, it has received, applied for, or is in the process of applying for, a number of patents to protect proprietary inventions. Costs incurred in connection with patent applications have been expensed as incurred. F-7 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Revenue Recognition The Company is currently engaged in research and development of its proprietary technology. Revenue derived from contract research and feasibility studies is recognized as the related services are performed. Certain contracts also contain provisions whereby the Company may receive additional payments if certain events occur. Such amounts will be recognized as revenue when earned. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances, such as the manner in which an asset is used, indicate that their carrying amount may not be recoverable. Impairment losses are recognized when a long-lived asset's carrying value exceeds the expected undiscounted cash flows related to that asset. The amount of the impairment loss is the difference between the carrying value and the fair market value of the asset. The fair market value of an asset is determined based upon discounted cash flows. Net Loss Per Share For the year ended July 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"). As required by SFAS No. 128, the prior years' loss per share data have been restated to conform to the provisions of SFAS No. 128; however, the impact of the restatement was not material. Net loss per share, basic and diluted, is computed on the basis of the net loss for the period divided by the weighted average number of shares of Common Stock outstanding during the period. The diluted net loss per share for all periods presented excludes the number of shares issuable upon exercise of outstanding stock options, warrants and convertible debt since such inclusion would be antidilutive. Disclosures required by SFAS No. 128 have been included in Note 10. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash equivalents and marketable securities. The Company generally invests its excess funds in obligations of the U.S. government and its agencies, bank deposits, mortgage backed securities, and investment grade debt securities issued by corporations and financial institutions. The Company holds no collateral for these financial instruments. F-8 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-based Employee Compensation The accompanying financial position and results of operations of the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no compensation expense is recognized in the accompanying financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the quoted market price of the Company's stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock as defined. Disclosure required by Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), including pro forma operating results had the Company prepared its financial statements in accordance with the fair value based method of accounting for stock-based compensation, has been included in Note 9. The fair value of options and warrants granted to non-employees for goods or services are included in the financial statements and expensed as the goods are utilized or the services performed, respectively. Deferred Financing Costs Direct costs incurred in connection with obtaining financing have been capitalized and are being amortized on a basis which approximates the interest method over the term of the financing. Impact of the Future Adoption of Recently Issued Accounting Standards The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") in June 1997. Comprehensive income represents the change in net assets of a business enterprise as a result of nonowner transactions. Management does not believe that the future adoption of SFAS 130 will have a material effect on the Company's financial position or results of operations. The Company will adopt SFAS No. 130 for the year ending July 31, 1999. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that a business enterprise report certain information about operation segments, products and services, geographic areas of operation, and major customers in complete sets of financial statements and in condensed financial statements for interim periods. Management does not believe that the future adoption of SFAS No. 131 will have a material effect on the Company's financial statements. The Company is required to adopt this standard for the year ending July 31, 1999. F-9 Emisphere Technologies, Inc. Notes to Financial Statements, Continued In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement modifies financial statement disclosures related to pension and other postretirement plans, and therefore will not have an effect on the Company's financial position or results of operations, and is effective for periods beginning after December 15, 1997. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes a comprehensive standard on accounting for derivatives and hedging activities, and is effective for periods beginning after June 15, 1999. Management does not believe that the future adoption of SFAS No. 133 will have a material effect on the Company's financial position or results of operations. 3. Marketable Securities: The Company considers its marketable securities to be "available-for- sale," as defined by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") and, accordingly, unrealized holding gains and losses are excluded from operations and reported as a net amount in a separate component of stockholders' equity. The following table summarizes the amortized cost basis and aggregate fair value of marketable securities, and the gross unrealized holding gains and losses, at July 31, 1997 and 1998, respectively.
Amortized Fair Unrealized Holding Cost Basis Value Gains (Losses) Net ------------ ------------ --------- ---------- -------- 1997 Maturities between one and two years: U.S. Government securities $ 3,893,219 $ 3,907,160 $ 16,523 $ (2,582) $ 13,941 Corporate debt securities 3,598,491 3,603,579 5,088 5,088 Mortgage backed securities 3,775,038 3,780,516 5,823 (345) 5,478 ------------ ------------ --------- ---------- -------- $ 11,266,748 $ 11,291,255 $ 27,434 $ (2,927) $ 24,507 ============ ============ ========= ========== ======== 1998 Maturities less than one year: Corporate debt securities $ 4,300,701 $ 4,301,393 $ 1,161 $ (469) $ 692 Maturities between one and three years: Corporate debt securities 9,163,782 9,168,340 6,058 (1,500) 4,558 ------------ ------------ --------- ---------- -------- $ 13,464,483 $ 13,469,733 $ 7,219 $ (1,969) $ 5,250 ============ ============ ========= ========== ========
F-10 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Realized gains and losses are included as a component of investment income. For the year ended July 31, 1996, gross realized losses were approximately $22,000, while gross realized gains were approximately $48,000. For the year ended July 31, 1997, gross realized gains and losses were not significant. For the year ended July 31, 1998, gross realized gains were approximately $14,000. In computing realized gains and losses, the Company determines the cost of its marketable securities on a specific identification basis. Such cost includes the direct costs to acquire the securities, adjusted for the amortization of any discount or premium. The fair value of marketable securities has been estimated based on quoted market prices. 4. Equipment and Leasehold Improvements: Equipment and leasehold improvements consist of the following: Useful Lives in Years 1997 1998 ------------- ----------- ----------- Equipment 3-7 $ 3,863,659 $ 4,674,232 Leasehold improvements Life of lease 1,214,567 9,269,339 ----------- ----------- 5,078,226 13,943,571 Less, Accumulated Depreciation and amortization 3,032,139 4,323,715 ----------- ----------- $ 2,046,087 $ 9,619,856 =========== =========== During May 1998, the Company relocated its operations and subleased certain office and laboratory space. In connection therewith, the Company incurred a general and administrative charge of approximately $300,000 which represented the writedown of leasehold improvements at the subleased space net of the excess of sublease rental income and related rental expense. 5. Commitments and Contingencies: a. The Company leases office and laboratory space under noncancelable leases expiring in various years through 2008. The leases provide for rental holidays and escalations of the minimum rent during the lease term as well as additional rent based upon increases in real estate taxes and common maintenance charges. The Company records rent expense from leases with rental holidays and escalations using the straight- line method, thereby prorating the total rental commitment over the term of the leases. Under this method, the deferred lease liability represents the differences between the minimum cash rental payments and the rent expense computed on a straight-line basis. F-11 Emisphere Technologies, Inc. Notes to Financial Statements, Continued As of July 31, 1998, future minimum rental payments are as follows: Years Minimum Ending Rental July 31, Payments -------- ------------ 1999 $ 876,703 2000 1,034,120 2001 1,187,864 2002 1,121,826 2003 1,308,544 Thereafter 5,443,900 ------------ $ 10,972,957 As described in Note 4, in July 1998, the Company entered into a sublease (the "Sublease") for a portion of its former premises, which extends to January 2002. As of July 31, 1998, future minimum rentals to be received under the Sublease are as follows: Minimum Years Rentals Ending to be July 31, Received -------- ------------ 1999 $ 184,000 2000 207,033 2001 218,866 2002 111,995 ------------ $ 721,894 Rent expense for the years ended July 31, 1996, 1997 and 1998 was approximately $256,000, $256,000 and $1,230,000, respectively. Additional charges for real estate taxes and common maintenance charges were not material for these periods. b. The Company, for the years ended July 31, 1996, 1997 and 1998 made payments for research totaling approximately $426,000, $847,000 and $847,000, respectively, to eight universities and a research organization ("entities"). Certain members of the Company's Board of Directors are affiliated with these entities. Under various agreements, as amended, the Company is obligated to pay minimum fees totaling approximately $1,062,000, $111,000 and $6,000 during the years ending July 31, 1999, 2000 and 2001, respectively. F-12 Emisphere Technologies, Inc. Notes to Financial Statements, Continued 6. Research and Development Contracts: The Company enters into research and development contracts with pharmaceutical companies providing for, among other things, the services the Company is to perform and the related fee and payment terms. Certain contracts contain provisions whereby the Company may be required to perform additional services in consideration for amounts defined in the respective agreements. In certain instances, the Company is entitled to the receipt of additional payments in the event certain testing results are achieved. In addition, the contracts contain provisions which require the Company to negotiate the terms of a licensing agreement contemplating the exclusive worldwide use of the Company's proprietary technology with the specific product under contract. 7. Notes Payable: On May 1, 1998 (the "Issuance Date"), the Company issued $13,500,000 of its 5% Senior Convertible Notes, due May 1, 2001 (the "Notes"). Interest on the outstanding Notes accrues from the Issuance Date and is payable annually in arrears beginning on May 1, 1999 either in cash, or at the election of the Company and subject to certain conditions, in shares of the Company's common stock (the "Interest Shares"). Such Interest Shares will have a value equal to the interest payment due in cash as defined. At July 31, 1998, the Company had accrued $168,750 of interest on the Notes. Note holders may, at any time prior to the maturity date, convert any outstanding and unpaid principal amount of the Notes and accrued and unpaid interest into shares of the Company's common stock at a conversion price (the "Conversion Price"), subject to certain floor prices as defined during the first 180 days from the Issuance Date, equal to the lowest trade price as reported on the NASDAQ National Market during the ten trading days immediately preceding the date of conversion. In no event may the holder convert at less than $10 per share (adjusted for stock splits, stock dividends, combinations or capital reorganizations) and no holder may convert if the conversion would result in the holder owning more than 4.9% of the Company's common stock then outstanding. The maximum number of shares that can be issued upon conversion of the Notes is 1,000,000. If at any time the number of shares that would otherwise be issuable upon conversion of the Notes exceeds 1,000,000, the Company may be required by the holder to redeem, subject to certain conditions, at a premium, up to $3.5 million of the Notes so that the conversion of the remaining portion does not result in more than 1,000,000 shares being issued. In the case of certain events which adversely affect the ability of the holder to trade or sell shares of the Company's common stock resulting from conversion of any portion of the Notes, as defined, the holder has the right to require the Company to repurchase the outstanding principal and interest on the Notes at a premium. As long as any principal or interest on the Notes remains unpaid, the Company is bound by certain covenants including a defined limit on the amount of additional indebtedness the Company may incur. In the event of default by the Company, as defined, principal, including premiums, and accrued interest, become due immediately. F-13 Emisphere Technologies, Inc. Notes to Financial Statements, Continued If any portion of the Notes has not been converted by May 1, 2001, the holder may elect to convert the outstanding amount of principal and interest into shares of the Company's common stock at the Conversion Price subject to the limitations on the maximum number of shares and maximum percentage ownership permitted. If, at maturity, the holder does not elect to convert the outstanding principal and interest into shares of the Company's common stock, the Company may at its option issue four-year 13.75% notes in exchange for the Notes. As of July 31, 1998, the estimated fair value of the Notes approximated their carrying value, based on replacement cost. In connection with the issuance of the Notes, the Company incurred direct cost to obtain this financing of approximately $800,000. Such amount has been classified as deferred financing costs. Amortization of deferred financing costs totaled $67,500 for the year ended July 31, 1998. 8. Stockholders' Equity and the Rights Plan: The Company's certificate of incorporation provides for the issuance of one million shares of preferred stock with the rights, preferences, qualifications and terms to be determined by the Company's Board of Directors. As of July 31, 1998, there were no shares of preferred stock outstanding. On February 23, 1996, the Company's Board of Directors (the "Board") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock ("A Preferred Stock") at an exercise price of $80. The Rights are not exercisable, or transferable apart from the common stock, until the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 20% or more of the outstanding common stock of the Company or (ii) ten business days (or such later date, as defined) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person, or group, of 20% or more of the outstanding common stock of the Company. Furthermore, if the Company enters into consolidation, merger, or other business combinations, as defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of A Preferred Stock, a number of shares of common stock of the acquiring company having a value of two times the exercise price of the Right, as defined. The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain defined restrictions, for $.01 per Right, and expire on February 23, 2006. F-14 Emisphere Technologies, Inc. Notes to Financial Statements, Continued As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as A Preferred Stock. A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend declared on the Company's common stock. The A Preferred shares have a liquidation preference, as defined. In addition, each share will have 100 votes and will vote together with the common shares. 9. Stock Option and Employee Stock Purchase Plans: Stock Option Plans The Company currently has two option plans, the 1991 Stock Option Plan and the 1995 Non-Qualified Stock Option Plan, (individually the "91 Plan" and "95 Plan" respectively, or collectively, the "Plans"). Under the 91 Plan and the 95 Plan, a maximum of 1,700,000 and 2,100,000 shares of Common Stock, respectively, are available for awards to employees, consultants and other individuals who render services to the Company (collectively, "Optionees"). The 91 Plan provides for the grant of either incentive stock options ("ISOs"), as defined by the Internal Revenue Code, or options which do not qualify as ISOs ("Non-ISOs"). The options are awarded by an independent committee of the Board who determine the terms including exercise price and vesting period. Generally, the options expire within a five to ten-year period as determined by the committee and as defined by the Plans. The terms of the 95 Plan provide for the granting to officers and other key employees the option to purchase the Company's Common Stock. The number and terms of each grant will be determined by an independent committee of the Board who will determine option exercise price, vesting and expiration date. Options granted under the Plans generally vest over a five-year period. As of July 31, 1998, shares available for future grants under the Plans amounted to 236,489. The following table summarizes stock option information for the Plans as of July 31, 1998: Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $1.50 - $1.65 94,166 6.76 yrs $ 1.50 55,766 $ 1.51 $2.63 - $2.89 5,442 6.81 2.70 5,142 2.71 $4.00 - $6.00 73,494 5.81 4.01 56,200 4.01 $6.63 - $9.75 1,407,500 7.22 8.64 581,000 8.65 $10.00 - $13.75 1,439,305 5.38 12.01 1,223,605 12.26 $15.13 - $22.00 455,822 5.41 16.91 87,500 18.38 $23.00 - $23.25 8,000 6.91 23.09 3,000 23.25 --------- --------- $1.50 - $23.25 3,483,729 6.18 10.85 2,012,463 10.95 ========= ========= Transactions involving stock options awarded under the Plans during 1996, 1997 and 1998 are summarized as follows: F-15 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Weighted Weighted Average Average Number Exercise Number Exercise Outstanding Price Exercisable Price ----------- -------- ----------- -------- Balance, July 31, 1995 624,261 $ 8.55 225,967 $11.88 1996 Granted 1,545,024 $ 8.92 Canceled (158,258) $ 8.70 Exercised (29,609) $ 3.60 ----------- Balance outstanding July 31, 1996 1,981,418 $ 8.90 506,962 $ 9.75 1997 Granted 1,260,531(1) $12.43 Canceled (43,000) $13.75 Exercised (33,323) $ 9.86 ----------- Balance outstanding July 31, 1997 3,165,626 $10.23 1,868,085 $10.98 1998 Granted 340,272 $17.08 Canceled (6,350) $15.50 Exercised (15,819) $ 5.98 ----------- Balance outstanding July 31, 1998 3,483,729 $10.85 2,012,463 $10.95 =========== (1)Includes 909,031 options granted to two executive officers. The fair market value of the Company's common stock on the date of grant was below the exercise price of these options. Outside Directors' Plan The Company has adopted a stock option plan for outside directors (the "Outside Directors' Plan") which, as amended, currently provides for the grant to directors who are neither officers nor employees of the Company nor holders of more than 5% of the Company's common stock, options (i) to purchase 35,000 shares of the Common Stock on the date of initial election or appointment to the Board and (ii) to purchase 21,000 shares of the Common Stock on the fifth anniversary thereof and every three years thereafter. The options have an exercise price equal to the fair market value of the Common Stock on the date of grant, vest at the rate of 7,000 shares per year and expire ten years after the date of grant. Under the Outside Directors' Plan in effect prior to January 29, 1997, options to purchase 70,000 shares were granted to directors upon their initial election or appointment to the Board. F-16 Emisphere Technologies, Inc. Notes to Financial Statements, Continued The following table summarizes stock option information for the Outside Directors' Plan as of July 31, 1998: Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $8.63 70,000 7.89 Yrs $ 8.63 53,332 $ 8.63 $13.00 - $13.75 273,000 5.45 $13.17 231,000 $13.07 $23.50 35,000 8.50 $23.50 7,000 $23.50 ----------- ----------- $8.63 - $23.50 378,000 6.19 $13.29 291,332 $12.51 =========== =========== Transactions involving stock options awarded under the Outside Directors' Plan during 1996, 1997 and 1998 are summarized as follows: Weighted Weighted Average Average Number Exercise Number Exercise Outstanding Price Exercisable Price ----------- -------- ----------- -------- Balance, July 31, 1995 210,000 $13.00 150,000 $13.00 1996 Granted 70,000 $ 8.63 ----------- Balance outstanding July 31, 1996 280,000 $11.91 196,666 $12.63 1997 Granted 98,000 $17.23 ----------- Balance outstanding July 31, 1997 378,000 $13.29 243,333 $12.40 ----------- Balance outstanding July 31, 1998 378,000 $13.29 291,332 $12.51 =========== Non-Plan Options The Company's Board of Directors has issued options to two senior executive officers, ("Executives"), the Emisphere Charitable Foundation and a consultant not covered by the Plans or the Outside Directors' Plan ("Non-Plan Options"). The respective employment agreements for the Executives also contain provisions whereby the Executives are allowed to borrow defined amounts from the Company in connection with exercise of options. Outstanding loans bear interest at rates as defined. The number and terms of each grant (option exercise price, vesting and expiration date) were determined by the Board. Non-Plan Options generally vest over a five-year period. F-17 Emisphere Technologies, Inc. Notes to Financial Statements, Continued The following table summarizes stock option information for the Non-Plan Options as of July 31, 1998: Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $6.25 - $9.25 407,822 2.00 yrs $ 8.55 407,822 $ 8.55 $9.75 - $13.75 15,000 5.02 $ 9.75 15,000 $ 9.75 ----------- ----------- $6.25 - $13.75 422,822 2.11 $ 8.59 422,822 $ 8.59 =========== =========== Transactions involving awards of Non-Plan Options during 1996, 1997 and 1998 are summarized as follows: Weighted Weighted Average Average Number Exercise Number Exercise Outstanding Price Exercisable Price ----------- -------- ----------- -------- Balance, July 31, 1995 1,453,853 $11.50 1,228,595 $11.15 1996 Granted 56,000 $ 8.09 Canceled (15,000) $12.38 Exercised (6,000) $ 3.63 ---------- Balance outstanding July 31, 1996 1,470,853 $11.28 496,822 $ 9.59 1997 Canceled (987,031) $12.61 Exercised (60,000) $ 8.23 ---------- Balance outstanding July 31, 1997 423,822 $ 8.62 423,822 $ 8.62 1998 Canceled (1,000) $18.50 ---------- Balance outstanding July 31, 1998 422,822 $ 8.59 422,822 $ 8.59 ========== Employee Stock Purchase Plans The Company has adopted two employee stock purchase plans (the "Purchase Plans"), the 1994 Employee Stock Purchase Plan (the "Qualified Plan") and the 1994 Non-Qualified Employee Stock Purchase Plan (the "Non-Qualified Plan"). The Purchase Plans provide for the grant to all employees of options to use up to 15% of their quarterly compensation, as such percentage is determined by the Board prior to the date of grant, to purchase shares of the Common Stock at a price per share equal to the lesser of the fair market value of the Common Stock on the date of grant or 85% of the fair market value on the date of exercise. Options are granted automatically on the first day of each fiscal quarter and expire six months after the date of grant. The Qualified Plan is not available for employees owning more than 5% of the Common Stock and imposes certain other quarterly limitations on the option grants. Options under the Non- Qualified plan are granted to the extent the option grants are restricted under the Qualified Plan. The Plans provide for the issuance of up to 500,000 shares of the Common Stock under the Qualified Plan and 100,000 shares under the Non-Qualified Plan. F-18 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Purchases of Common Stock during the years ended July 31, 1996, 1997 and 1998 are summarized as follows: Qualified Plan Non-Qualified Plan ----------------------------- ------------------------------ Shares Shares Purchased Price Rage Purchased Price Range --------- -------------- --------- --------------- 1996 72,975 $1.50 - $9.00 17,372 $1.50 - $7.38 1997 31,348 $6.30 - $17.75 8,111 $6.26 - $13.18 1998 34,851 $8.23 - $17.21 2,749 $13.76 - $16.47 At July 31, 1998, shares reserved for future purchases under the Qualified and Non-Qualified Plans were 293,844 and 66,688, respectively. Pro Forma Operating Results The following tables summarizes the pro forma operating results of the Company had compensation costs for the Plans, Outside Directors' Plan, the Non-Plan Options and the Purchase Plans been determined in accordance with the fair value-based method of accounting for stock-based compensation as prescribed by SFAS No. 123. Since option grants awarded during 1996, 1997 and 1998 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on the future years of the application of the fair value-based method. Except as noted above, the options exercise price equals the quoted market price of the Company's common stock on the date of grant. Years ended July 31, -------------------------------------------- 1996 1997 1998 ------------ ------------- ------------- Pro forma net loss $(7,570,740) $(15,408,336) $(10,409,698) ============ ============= ============= Pro forma net loss per share $(0.90) $(1.53) $(0.97) ======= ======= ======= For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of the options granted during 1996, 1997 and 1998 was $5.97, $6.82 and $10.96, respectively. The following assumptions were used in computing the fair value of options granted: expected volatility of 80%, expected lives of 5 years, except for the Purchase Plans where the expected lives are 6 months; zero divided yield and weighted-average risk-free interest rate of 5.8% in 1996, 6.4% in 1997 and 5.9% in 1998. F-19 Emisphere Technologies, Inc. Notes to Financial Statements, Continued 10. Net Loss Per Share: The Company's basic net loss per share amounts have been computed by dividing net loss by the weighted average number of Common Shares outstanding. For the years ended July 31, 1998, 1997, and 1996, the Company reported net losses and, therefore, no common stock equivalents were included in the computation of diluted net loss per share since such inclusion would have been antidilutive. The calculations of basic and diluted net loss per share are as follows: Net Loss Shares Per Share (Numerator) (Denominator) Amount ------------ ------------- --------- 1998 Basic and Diluted $(7,066,288) 10,777,728 $(0.66) 1997 Basic and Diluted $(7,321,305) 9,519,028 $(0.77) 1996 Basic and Diluted $(6,107,601) 8,457,438 $(0.72) Options, warrants and shares of common stock issuable upon conversion of Notes and related accrued interest which have been excluded from the diluted per share amount because their effect would have been antidilutive include the following:
1996 1997 1998 -------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Number Price Number Price Number Price --------- --------- --------- --------- --------- --------- Options and warrants with exercise prices below the average fair market value of the Company's common stock for the respective year 2,111,075 $ 8.06 4,128,298 $10.47 4,029,129 $10.41 Options and warrants with exercise prices above the average fair market value of the Company's common stock for the respective year 1,871,196 $13.15 89,150 $21.50 255,422 $19.66 Notes and accrued interest 1,016,875
F-20 Emisphere Technologies, Inc. Notes to Financial Statements, Continued 11. Major Customers: During the year ended July 31, 1996, approximately 96% of the revenue from contract research was derived from Elan Corporation plc ("Elan"). During the year ended July 31, 1997, approximately 74% of the revenue from contract research was derived from Ebbisham Ltd. The remainder consisted of payments from Eli Lilly & Company ("Lilly") (25%), and from two pharmaceutical companies for which the Company performed feasibility studies. During the year ended July 31, 1998, approximately 41% of the revenue from contract research was derived from Lilly. The remainder consisted of payments from Ebbisham Ltd. (45%) and Novartis Pharma AG ("Novartis") (14%). 12. Income Taxes: There is no provision (benefit) for federal or state income taxes for the years ended July 31, 1996, 1997 and 1998, since the Company has incurred operating losses and has established a valuation allowance equal to the total deferred tax asset. The tax effect of temporary differences, net operating loss carry-forwards and research and experimental tax credit carry-forwards as of July 31, 1997 and 1998 was as follows: 1997 1998 ------------ ------------- Deferred tax assets and valuation allowance: Accrued liabilities $ 102,292 $ 356,194 Equipment and leasehold improvements 181,863 70,132 Net operating loss carry-forwards 19,217,509 19,404,873 Research and experimental tax credit carry-forwards 2,454,215 2,454,215 Valuation allowance (21,955,879) (22,285,414) ------------- ------------- $ - $ - As of July 31, 1998, the Company has available, for tax reporting purposes, unused net operating loss carry-forwards of approximately $47 million which will expire in various years from 2001 to 2013. The Company's research and experimental tax credit carry-forwards expire in various years from 2001 to 2013. Future ownership changes may limit the future utilization of these net operating loss and research and development tax credit carry-forwards as defined by the Internal Revenue Code. F-21 Emisphere Technologies, Inc. Notes to Financial Statements, Continued 13. Retirement Plan: The Company adopted the provisions of a defined contribution retirement plan (the "Plan"). The terms of the Plan, as amended, allow eligible employees who have met certain age and service requirements to participate by electing to contribute to the Plan, a percentage of their compensation to be set aside to pay their future retirement benefits as defined by the Plan. The Company has agreed to make discretionary contributions to the Plan. For the years ended July 31, 1996, 1997 and 1998 the Company made contributions to the Plan totaling approximately, $36,000, $58,000 and $139,000, respectively. 14. The Emisphere Charitable Foundation, Inc.: During 1993, the Board authorized the incorporation of The Emisphere Charitable Foundation, Inc. (the "Foundation"). The Foundation has since been incorporated and intends to seek tax exempt status under section 501(c)(3) of the Internal Revenue Code. The Foundation's charitable purpose is to grant financial assistance to pay expenses incurred by persons or their families who are suffering from serious, debilitating or prolonged illnesses. The Company intends to make contributions to the Foundation in the form of cash and Company stock options. Three officers of the Company are directors of the Foundation. During the year ended July 31, 1994, the Company granted the Foundation 15,000 options to acquire an equal number of shares of the Company's Common Stock at an exercise price, per share, of $9.75. 15. Ebbisham Limited: Ebbisham Limited, an Irish corporation ("Ebbisham") owned jointly by Elan and the Company, was formed in September 1996 to develop and market heparin products utilizing technologies contributed by Elan and the Company. The initial funding of $4.5 million for Ebbisham was provided by Elan; all additional funding is to be provided equally by Elan and the Company. On August 5, 1998, Elan and the Company each contributed an additional $5 million to Ebbisham. Pursuant to agreements with Elan and Ebbisham, the Company is to perform certain research and development services on behalf of Ebbisham. In connection therewith, the Company recognized contract research revenues during each of the three fiscal years ended July 31, 1998 of approximately $3.0 million, $4.0 million and $7.1 million, respectively. Such amounts include $3 million recognized as revenue during the 1996 fiscal year for certain research and development expenses incurred by the Company prior to December 1996. As of July 31, 1997 and 1998, amounts due from Ebbisham for services rendered totaled approximately $649,000 and $7.7 million, respectively. On August 6, 1998, the Company received a payment from Ebbisham of approximately $5.0 million. In September 1995, the Company issued and sold to an affiliate of Elan 600,000 shares of the Common Stock and warrants to purchase for $16.25 per share an additional 250,000 shares for a total of $7.5 million. In May 1998, Elan exercised its warrants and was issued the additional 250,000 shares. F-22 Emisphere Technologies, Inc. Notes to Financial Statements, Continued Selected financial data of Ebbisham as of July 31, 1997 and 1998 and for the period from September 26, 1996 (inception) to July 31, 1997 and for the year ended July 31, 1998 is as follows: Balance Sheet Data July 31, -------------------------------- 1997 1998 ------------- ------------- Assets: Cash $ 708,424 $ 741,184 ============= ============= Liabilities and Stockholders' Deficit: Accounts payable (1) $ 1,288,335 $ 9,408,518 Subordinated debt 4,500,000 4,500,000 Stockholders' deficit (5,079,911) (13,167,334) ------------- ------------- Total liabilities and stockholders' deficit $ 708,424 $ 741,184 ============= ============= (1) Includes $648,786 and $7,710,056 due the Company at July 31, 1997 and 1998, respectively Statement of Operations Data Period from September 26, 1996 Year Ended (inception) to July 31, July 31, 1997 1998 ------------------ ------------- Total Revenue $ 72,045 $ 32,760 Total Expenses (2) (5,171,956) (8,120,183) ------------- ------------- Net loss $ (5,099,911) $ (8,087,423) ============= ============= (2) Includes $3,999,733 and $7,061,270 related to services performed by the Company on behalf of Ebbisham for the period from September 26, 1996 (inception) to July 31, 1997 and the year ended July 31, 1998 F-23 Emisphere Technologies, Inc. Notes to Financial Statements, Continued 16. Eli Lilly and Company: In February 1997, the Company and Eli Lilly and Company ("Lilly") entered into an agreement to combine Lilly's therapeutic protein and formulation capabilities with the Company's carrier technologies. The agreement provides for periodic payments to the Company to fund a research and development program. Under the agreement, the Company granted to Lilly a series of options to acquire licenses to use the Company's technologies. In March 1998, Lilly exercised two of its options and entered into two license agreements to use the Company's technologies in connection with certain Lilly proteins. The license agreements provide for future payments in the event certain milestones are achieved, as defined, as well as royalty payments if a commercial product results from the collaboration. During the years ended July 31, 1997 and 1998, the agreement with Lilly generated revenues to the Company of $1,365,000 and $6,557,000, respectively. 17. Novartis Pharma AG: In December 1997, the Company and Novartis Pharma AG ("Novartis") entered into a research collaboration to investigate the Company's technology for oral delivery of two selected Novartis compounds. The agreement provides for an initial research collaboration period of at least 12 months and two options on the part of Novartis to acquire exclusive licenses to use the Company's technologies for the development and commercialization of oral formulations of the Novartis compounds. Upon exercise of its options to acquire technology licenses from the Company, Novartis has the obligation (which may be waived by the Company) to purchase in four tranches up to $16 million of the Company's Common Stock at prices based on market prices at the time of exercise (subject to certain price limitations with respect to the first tranche). Under the agreement, Novartis is to make quarterly payments to the Company for work performed by the Company in connection with the collaboration and is to make future payments in the event certain milestones are achieved. During the year ended July 31, 1998, the Company recognized $2,250,000 in revenues under the Novartis agreement. F-24 Report of Independent Accountants New York, New York October 8, 1998 To the Board of Directors and Stockholders of Ebbisham Limited: In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial position of EBBISHAM LIMITED ("Ebbisham") (a development stage enterprise) at July 31, 1997 and 1998, and the results of its operations and its cash flows for the period from September 26, 1996 (inception) to July 31, 1997, the year ended July 31, 1998 and the cumulative period from September 26, 1996 (inception) to July 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Ebbisham's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP F-25 EBBISHAM LIMITED (a development stage enterprise) Balance Sheets July 31, --------------------------- ASSETS: 1997 1998 ------------ ------------- Current assets: Cash $ 708,424 $ 741,184 ------------ ------------- Total assets $ 708,424 $ 741,184 ============ ============= LIABILITIES and STOCKHOLDERS' DEFICIT: Current liabilities: Due to Elan Corporation plc $ 639,549 $ 1,698,462 Due to Emisphere Technologies, Inc. 648,786 7,710,056 ------------ ------------- Total current liabilities 1,288,335 9,408,518 Subordinated debt 4,500,000 4,500,000 ------------ ------------- Total liabilities 5,788,335 13,908,518 ------------ ------------- Stockholders' deficit: "A" Ordinary shares, par value $1.00 per share, 5,000,000 shares authorized, 10,000 shares issued and outstanding at July 31, 1997 and 1998 10,000 10,000 "B" Ordinary shares, par value $1.00 per share, 5,000,000 shares authorized, 10,000 shares issued and outstanding at July 31, 1997 and 1998 10,000 10,000 Deficit accumulated during the development stage (5,099,911) (13,187,334) ------------ ------------- Total stockholders' deficit (5,079,911) (13,167,334) ------------ ------------- Total liabilities and stockholders' deficit $ 708,424 $ 741,184 ============ ============= The accompanying notes are an integral part of the financial statements. F-26 EBBISHAM LIMITED (a development stage enterprise) Statements of Operations For the Cumulative for period from the period from September 26, September 26, 1996 1996 (Inception) (Inception) through Year Ended through July 31, 1997 July 31, 1998 July 31, 1998 ------------- ------------- --------------- Revenues: Interest income $ 72,045 $ 32,760 $ 104,805 Expenses: Research and development (5,171,956) (8,120,183) (13,292,139) ------------- ------------- --------------- Net loss $(5,099,911) $(8,087,423) $(13,187,334) ============ ============ ============= The accompanying notes are an integral part of the financial statements. F-27 EBBISHAM LIMITED (a development stage enterprise) Statements of Stockholders' Deficit For the period from September 26, 1996 (inception) to July 31, 1998 including the period from September 26, 1996 (inception) to July 31, 1997 and the year ended July 31, 1998
Number of Shares ------------------ Ordinary Ordinary Ordinary Ordinary Accumulated "A" "B" "A" "B" Deficit Total Amount -------- -------- --------- --------- ------------- ------------- Ordinary shares issued in consideration for cash 10,000 10,000 $ 10,000 $ 10,000 $ 20,000 Net loss for the period From September 26, 1996 (inception) to July 31, 1997 $ (5,099,911) (5,099,911) -------- -------- --------- --------- ------------- ------------- Balance at July 31, 1997 10,000 10,000 10,000 10,000 (5,099,911) (5,079,911) Net loss for the year Ended July 31, 1998 (8,087,423) (8,087,423) -------- -------- --------- --------- ------------- ------------- Balance at July 31, 1998 10,000 10,000 $ 10,000 $ 10,000 $(13,187,334) $(13,167,334) ======== ======== ========= ========= ============= =============
The accompanying notes are an integral part of the financial statements. F-28 EBBISHAM LIMITED (a development stage enterprise) Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents
For the Cumulative for period from the period from September 26, September 26, 1996 1996 (Inception) (Inception) through Year Ended through July 31, 1997 July 31, 1998 July 31, 1998 ------------- ------------- -------------- Cash flows from operating activities: Net loss $(5,099,911) $(8,087,423) $(13,187,334) Changes in assets and liabilities: Increase in payable to Elan Corporation plc 639,549 1,058,913 1,698,462 Increase in payable to Emisphere Technologies, Inc. 648,786 7,061,270 7,710,056 ------------- ------------- -------------- Net cash (used in) provided by operating activities (3,811,576) 32,760 (3,778,816) ------------- ------------- -------------- Cash flows from financing activities: Proceeds from issuance of share capital 20,000 20,000 Proceeds from issuance of subordinated debt 4,500,000 4,500,000 ------------- -------------- Net cash provided by financing activities 4,520,000 4,520,000 ------------- -------------- Net increase in cash 708,424 32,760 741,184 Cash at beginning of period - 708,424 - ------------- ------------- -------------- Cash at end of period $ 708,424 $ 741,184 $ 741,184 ============= ============= ============== The accompanying notes are an integral part of the financial statements. F-29 EBBISHAM LIMITED (a development stage enterprise) Notes to Financial Statements 1. Organization and Business: Ebbisham Limited ("Ebbisham"), an Irish corporation, is an equally owned joint venture between Elan Corporation plc ("Elan") and Emisphere Technologies, Inc. ("Emisphere") (collectively the "Partners") formed in September 1996 to develop and market heparin products utilizing technologies contributed by the Partners. Ebbisham is managed by a committee ("Management Committee") consisting of equal representation from the Partners. The purpose of the Management Committee is to govern all activities of Ebbisham including the research and development activities undertaken by Ebbisham as well as the approval of budgets and determining the necessary financing to be provided by the Partners. As a development stage enterprise, Ebbisham's primary efforts to date have been devoted to research and development and raising capital. Ebbisham has limited capital resources and recurring net operating losses. Since inception, Ebbisham has received financial support from the Partners and is dependent upon receipt of additional capital investment from Elan and Emisphere to fund planned research activities. Ebbisham has received assurances from Emisphere that it will provide the necessary financial support to enable Ebbisham to continue to operate through December 1, 1999. On August 5, 1998, Elan and Emisphere each contributed $5 million to Ebbisham. In addition to the normal risks associated with a new business venture, there can be no assurance that the Company's drug delivery technology will be commercially viable. In addition, the Company operates in an environment of rapid change in technology and is dependent upon the services of its employees and consultants. 2. Summary of Significant Accounting Policies: Basis of Preparation The accompanying financial statements of Ebbisham were prepared in accordance with generally accepted accounting principles in the United States. Cash The carrying amount reported in the balance sheet for cash approximates its fair value. Cash subjects Ebbisham to concentrations of credit risk. Income Taxes Ebbisham accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that Ebbisham recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined on the basis of the difference between the tax bases of assets and liabilities and their respective financial-reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. F-30 EBBISHAM LIMITED (a development stage enterprise) Notes to Financial Statements, Continued Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. Subordinated Debt: On September 26, 1996 (inception) Ebbisham issued $4,500,000 of subordinated debt to Elan, which is due on September 26, 2006. The subordinated debt is interest-free until Ebbisham has sufficient equity, as defined, and has earned a profit after tax in the preceding financial year of not less than $100,000. The rate of interest in a given financial year is as follows: - 5% if profits after tax for that financial year exceed $100,000 but do not exceed $5,000,000. - 10% if profits after tax for that financial year exceed $5,000,000 but do not exceed $10,000,000. - 15% if profits after tax for that financial year exceed $10,000,000. The debt is subordinated to the claims of all other creditors of Ebbisham. 4. Stockholders' Deficit: Ebbisham's certificate of incorporation provides for the issuance of five million ordinary "A" shares and five million ordinary "B" shares. The rights and terms of both types of shares are identical except that Elan holds the ordinary "A" shares and Emisphere holds the ordinary "B" shares. F-31 EBBISHAM LIMITED (a development stage enterprise) Notes to Financial Statements, Continued 5. Income Taxes: Ebbisham is subject to the provisions of tax laws in Ireland. Accordingly, in the event that Ebbisham earns royalty income for its patents in the future, such amounts may be exempt from income tax under certain circumstances. In addition, in the event that taxable profits are derived from Ebbisham's manufacture of products, a tax would be imposed on profits earned at tax rates ranging from 10% to 32%. As of July 31, 1998, Ebbisham has available net operating loss carry-forwards of approximately $13 million, which, under certain circumstances, may be available to offset taxable income arising in the future. As a result of the uncertainty of whether Ebbisham will have future taxable income and whether the net operating losses being carried forward will be available to offset such taxable income, Ebbisham has established a valuation allowance equal to the total deferred tax asset. The total deferred tax asset, net of the valuation allowance, was not material. 6. Related-Party Transactions: On September 26, 1996 (inception), Ebbisham entered into certain agreements with Elan and Emisphere relating to the research and development of an oral heparin product under development. In accordance with these agreements, the Partners perform certain research and development activities on behalf of Ebbisham. During the period from September 26, 1996 (inception) through July 31, 1997, Ebbisham incurred research and development expenses for work performed by Elan and Emisphere of $1,172,223 and $3,999,733, respectively. For the year-ended July 31, 1998, Ebbisham incurred research and development expenses for work performed by Elan and Emisphere of $1,058,913 and $7,061,270, respectively. Cumulatively, for the period from September 26, 1996 (inception) through July 31, 1998, Ebbisham incurred research and development expenses for work performed by Elan and Emisphere of $2,231,136 and $11,061,003, respectively. 7. Subsequent Event: On August 5, 1998, Elan and Emisphere each advanced $5 million to Ebbisham in exchange for notes payable which are due in full on July 31, 1999. The notes payable do not bear interest, and may be repaid by Ebbisham prior to July 31, 1999 without penalties or premiums. If the funds are not available for Ebbisham to repay the notes by July 31, 1999, Emisphere has agreed to extend the terms of the notes to December 1, 1999 and to provide the necessary funding to repay amounts due Elan. F-32 EXHIBIT INDEX Incorporated Exhibit by Reference (1) (3) - Restated Certificate of Incorporation of the Company A - By-Laws of the Company B (4) - Rights Agreement dated as of February 23, 1996 C between the Company and Continental Stock Transfer & Trust Company - form of the 5% Senior Convertible Notes due 2001 D issued May 1, 1998 in the aggregate principal amount of $13,500,000 - form of the Note Purchase Agreement dated as of May D 1, 1998 by and between the registrant and each of Delta Opportunity Fund, Ltd., OTATO Limited Partnership, Fisher Capital Ltd., Wingate Capital Ltd., CCG Capital Ltd. and CCG Investment Fund Ltd. (10) - 1991 Stock Option Plan, as amended (2) - Stock Option Plan for Outside Directors, as amended A (2) - Employee Stock Purchase Plan E (2) - Non-Qualified Employee Stock Purchase Plan E (2) - 1995 Non-Qualified Stock Option Plan, as amended (2) - Directors' Deferred Compensation Stock Plan (2) - Employment Agreement dated as of October 6, 1995 E (2) between Michael M. Goldberg and the Company - Stock Option Agreements dated as of January 1, 1991, E (2)(3) February 15, 1991, December 1, 1991, August 1, 1992 and October 6, 1995 between Michael M. Goldberg and the Company - Employment Agreement dated as of October 6, 1995 E (2) between Sam J. Milstein and the Company - Stock Option Agreements dated as of January 1, 1991, E (2)(3) February 15, 1991, December 1, 1991, August 1, 1992 and October 6, 1995 between Sam J. Milstein and the Company - Purchase Agreement dated as of October 18, 1995 by E and between the Company and Elan International Services Limited - Letter Agreement dated as of September 26, 1996 F amending said Purchase Agreement - Joint Venture Agreement dated as of September 26, F 1996 by and among Elan Corporation plc, the Company and Ebbisham Limited - License Agreement dated as of September 26, 1996 by F and between Ebbisham Limited and Elan Corporation plc - License Agreement dated as of September 26, 1996 by F and between Ebbisham Limited and the Company - Stock Instrument dated as of September 26, 1996 by F and between Ebbisham Limited and Elan Corporation plc - Memorandum and Articles of Association of Ebbisham F Limited - Letter Agreement dated as of September 26, 1996 by F and among Elan Corporation plc, the Company and Ebbisham Limited - Research Collaboration and Option Agreement dated as B of February 26, 1997 between the Company and Eli Lilly and Company - Research Collaboration and Option Agreement dated as G of December 3, 1997 between the Company and Novartis Pharma AG (23) - Consent of PricewaterhouseCoopers LLP - Consent of PricewaterhouseCoopers LLP (27) - Financial Data Schedule ___________________ (1) If not filed herewith, filed with a corresponding exhibit number as an exhibit to the document referred to by letter as follows: A. Annual Report on Form 10-K for the fiscal year ended July 31, 1997. B. Quarterly Report on Form 10-Q/A (Amendment No.1) for the quarterly period ended January 31, 1997. C. Current Report on Form 8-K dated March 5, 1996. D. Current Report on Form 8-K dated July 1, 1998. E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995. F. Annual Report on Form 10-K for the fiscal year ended July 31, 1996. G. Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1997 (2) Management contract or compensatory plan or arrangement (3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K. -26- EMISPHERE TECHNOLOGIES, INC. 1991 STOCK OPTION PLAN as amended September 11, 1997 1. Purpose. The purpose of the Emisphere Technologies, Inc. 1991 Stock Option Plan (the "Plan") is to enable Emisphere Technologies, Inc. (the "Company") and its stockholders to secure the benefits of common stock ownership by key personnel of the Company and its subsidiaries. The Board of Directors of the Company (the "Board") believes that the granting of options under the Plan will foster the Company's ability to attract, retain and motivate those individuals who will be largely responsible for the continued profitability and long-term future growth of the Company. 2. Stock Subject to the Plan. The Company may issue and sell a total of 1,700,000 shares of its common stock, $.01 par value (the "Common Stock"), pursuant to the Plan. Such shares may be either authorized and unissued or held by the Company in its treasury. New options may be granted under the Plan with respect to shares of Common Stock which are covered by the unexercised portion of an option which has terminated or expired by its terms, by cancellation or otherwise. 3. Administration. The Plan will be administered by a committee (the "Committee") consisting of at least two directors appointed by and serving at the pleasure of the Board. If a Committee is not so established, the Board will perform the duties and functions ascribed herein to the Committee. To the extent required by the applicable provisions of Rule 16(b)-3 under the Securities Exchange Act of 1934, no member of the Committee shall have received an option under the Plan or any other plan within one year before his or her appointment or such other period as may be prescribed by said Rule. Subject to the provisions of the Plan, the Committee, acting in its sole and absolute discretion, will have full power and authority to grant options under the Plan, to interpret the provisions of the Plan and option agreements made under the Plan, to supervise the administration of the Plan, and to take such other action as may be necessary or desirable in order to carry out the provisions of the Plan. A majority of the members of the Committee will constitute a quorum. The Committee may act by the vote of a majority of its members present at a meeting at which there is a quorum or by unanimous written consent. The decision of the Committee as to any disputed question, including questions of construction, interpretation and administration, will be final and conclusive on all persons. The Committee will keep a record of its proceedings and acts and will keep or cause to be kept such books and records as may be necessary in connection with the proper administration of the Plan. 4. Eligibility. Options may be granted under the Plan to present or future key employees of the Company or a subsidiary of the Company (a "Subsidiary") within the meaning of Section 424(f) of the Internal Revenue Code of 1986 (the "Code"), and to consultants to the Company or a Subsidiary who are not employees. Options may not be granted to directors of the Company or a Subsidiary who are not also employees of or consultants to the Company and/or a Subsidiary. Subject to the provisions of the Plan, the Committee may from time to time select the persons to whom options will be granted, and will fix the number of shares covered by each such option and establish the terms and conditions thereof (including, without limitation, exercise price and restrictions on exercisability of the option or on the shares of Common Stock issued upon exercise thereof and whether or not the option is to be treated as an incentive stock option within the meaning of Section 422 of the Code (an "Incentive Stock option")). 5. Terms and Conditions of Options. Each option granted under the Plan will be evidenced by a written agreement in a form approved by the Committee. Each such option will be subject to the terms and conditions set forth in this paragraph and such additional terms and conditions not inconsistent with the Plan (and, in the case of an Incentive Stock Option, not inconsistent with the provisions of the Code applicable thereto) as the Committee deems appropriate. (a) Option Exercise Price. In the case of an option which is not treated as an Incentive Stock Option, the exercise price per share may not be less than the par value of a share of Common Stock on the date the option is granted; and, in the case of an Incentive Stock Option, the exercise price per share may not be less than 100% of the fair market value of a share of Common Stock on the date the option is granted (110% in the case of an optionee who, at the time the option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or a Subsidiary (a "ten percent shareholder")). For purposes hereof, the fair market value of a share of Common Stock on any date will be equal to the closing sale price per share as published by a national securities exchange on which shares of the Common Stock are traded on such date or, if there is no sale of Common Stock on such date, the average of the bid and asked prices on such exchange at the close of trading on such date or, if shares of the Common Stock are not listed on a national securities exchange on such date, the average of the bid and asked prices in the over the counter market at the close of trading on such date, or if the Common Stock is not traded on a national securities exchange or the over the counter market, the fair market value of a share of the Common Stock on such date as determined in good faith by the Committee. (b) Option Period. The period during which an option may be exercised will be fixed by the Committee and will not exceed ten years from the date the option is granted (five years in the case of an Incentive Stock Option granted to a "ten percent shareholder"). (c) Exercise of Options. No option will become exercisable unless the person to whom the option was granted remains in the continuous employ or service of the Company or a Subsidiary for at least one year (or for such other period as the Committee may designate) from the date the option is granted. Subject to earlier termination of the option as provided herein, unless the Committee determines otherwise, the option will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company or a Subsidiary following the date of grant: Full Years of Incremental Cumulative Continuous Percentage Percentage Employment/ of Option of Option Service Exercisable Exercisable Less than 1 0% 0% 1.. 20% 20% 2.. 20% 40% 3.. 20% 60% 4.. 20% 80% 5 or more 20% 100% All or part of the exercisable portion of an option may be exercised at any time during the option period, except that, without the consent of the Committee, no partial exercise of an option may be for less than 100 shares. An option may be exercised by transmitting to the Company (1) a written notice specifying the number of shares to be purchased, and (2) payment of the exercise price (or, if applicable, delivery of a secured obligation therefor), together with the amount, if any, deemed necessary by the Committee to enable the Company to satisfy its income tax withholding obligations with respect to such exercise (unless other arrangements acceptable to the Company are made with respect to the satisfaction of such withholding obligations). -2- (d) Payment of Exercise Price. The purchase price of shares of Common Stock acquired pursuant to the exercise of an option granted under the Plan may be paid in cash and/or such other form of payment as may be permitted under the option agreement, including, without limitation, previously-owned shares of Common Stock. The Committee may permit the payment of all or a portion of the purchase price in installments (together with interest) over a period of not more than five years. (e) Rights as a Stockholder. No shares of Common Stock will be issued in respect of the exercise of an option granted under the Plan until full payment therefor has been made (and/or provided for where all or a portion of the purchase price is being paid in installments). The holder of an option will have no rights as a stockholder with respect to any shares covered by an option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or distributions of other rights for which the record date is prior to the date such stock certificate is issued. (f) Nontransferability of Options. No option granted under the Plan may be assigned or transferred except by will or by the applicable laws of descent and distribution; and each such option may be exercised during the optionee's lifetime only by the optionee. (g) Termination of Employment or Other Service. If an optionee ceases to be employed by or to perform services for the Company and any Subsidiary for any reason other than death or disability (defined below), then each outstanding option granted to him or her under the Plan will terminate on the date three months after the date of such termination of employment or service (or, if earlier, the date specified in the option agreement). If an optionee's employment or service is terminated by reason of the optionee's death or disability (or if the optionee's employment or service is terminated by reason of his or her disability and the optionee dies within one year after such termination of employment or service), then each outstanding option granted to the optionee under the Plan will terminate on the date one year after the date of such termination of employment or service (or one year after the later death of a disabled optionee) or, if earlier, the date specified in the option agreement. For purposes hereof, the term "disability" means the inability of an optionee to perform the customary duties of his or her employment or other service for the Company or a Subsidiary by reason of a physical or mental incapacity which is expected to result in death or be of indefinite duration. (h) Incentive Stock Options. In the case of an Incentive Stock Option granted under the Plan, at the time the option is granted, the aggregate fair market value (determined at the time of grant) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the optionee during any calendar year may not exceed $100,000. (i) Other Provisions. The Committee may impose such other conditions with respect to the exercise of options, including, without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. 6. Capital Changes, Reorganization, Sale. (a) Adjustments Upon Changes in Capitalization. The aggregate number and class of shares for which options may be granted under the Plan, the number and class of shares covered by each outstanding option and the exercise price per share shall all be adjusted proportionately for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. -3- (b) Cash, Stock or Other Property for Stock. Except as provided in subparagraph (c) below, upon a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for or in connection with their shares of Common Stock, any option granted hereunder shall terminate, but the optionee shall have the right immediately prior to any such merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to exercise his or her option in whole or in part, whether or not the vesting requirements set forth in the option agreement have been satisfied. (c) Conversion of Options on Stock for Stock Exchange. If the shareholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of subparagraph (b) above. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement have been satisfied. (d) Fractional Shares. In the event of any adjustment in the number of shares covered by any option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded and each such option will cover only the number of full shares resulting from the adjustment. (e) Determination of Board to be Final. All adjustments under this paragraph 6 shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Unless an optionee agrees otherwise, any change or adjustment to an Incentive Stock Option shall be made in such a manner so as not to constitute a "modification" as defined in Section 424(h) of the Code and so as not to cause the optionee's Incentive Stock Option issued hereunder to fail to continue to qualify as an Incentive Stock Option. 7. Amendment and Termination of the Plan. The Board may amend or terminate the Plan. Except as otherwise provided in the Plan with respect to equity changes, any amendment which would increase the aggregate number of shares of Common Stock as to which options may be granted under the Plan, materially increase the benefits under the Plan, or modify the class of persons eligible to receive options under the Plan shall be subject to the approval of the holders of a majority of the Common Stock issued and outstanding. No amendment or termination may affect adversely any outstanding option without the written consent of the optionee. -4- 8. No Rights Conferred. Nothing contained herein will be deemed to give any individual any right to receive an option under the Plan or to be retained in the employ or service of the Company or any Subsidiary. 9. Governing Law. The Plan and each option agreement shall be governed by the laws of the State of Delaware. 10. Term of the Plan. The Plan shall be effective as of November 12, 1991, the date on which it was initially adopted by the Board, subject to the approval of the stockholders of the Company, which approval was granted on January 21, 1992. The amendment to the Plan increasing the number of shares available for issuance thereunder from 400,000 to 1,200,000 was adopted by the Board on May 9, 1994 and approved by the stockholders of the Company on December 20, 1994. The amendment to the Plan increasing the number of shares available for issuance thereunder from 1,200,000 to 1,400,000 was adopted by the Board on January 29, 1997 and approved by the stockholders of the Company on March 20, 1997. The Plan will terminate on November 11, 2001, unless sooner terminated by the Board. The rights of optionees under options outstanding at the time of the termination of the Plan shall not be affected solely by reason of the termination and shall continue in accordance with the terms of the option (as then in effect or thereafter amended). -5- EMISPHERE TECHNOLOGIES, INC. 1995 NON-QUALIFIED STOCK OPTION PLAN as amended September 11, 1997 1. Purpose The purpose of the 1995 Non-Qualified Stock Option Plan (the "Plan") of Emisphere Technologies, Inc. (the "Company") is to attract, compensate and retain well qualified officers and other key executive employees by providing them with an equity interest in the Company and a stake in its success. 2. Shares Subject to the Plan The Company may issue a total of 2,100,000 shares of its Common Stock, par value $.01 per share (the "Common Stock"), pursuant to the Plan. Such shares may include shares that have been subject to unexercised options, whether terminated or expired by their terms, by cancellation or otherwise. 3. Option Grants under the Plan Option grants under the Plan may be made to present and future officers and other key executive employees of the Company. Directors of the Company who are not also employees of the Company or a subsidiary shall not be eligible for an option grant under the Plan. Each option shall be to purchase a number of shares of the Common Stock pursuant to an option agreement setting forth the option exercise price, option termination date, vesting period and other terms and conditions as may be determined by the Committee (as defined below) at the time of the grant. In no event may any option be granted at an exercise price per share lower than the fair market value per share on the date of grant or with an option exercise period of more than ten years. 4. Administration The Plan shall be administered by a committee (the "Committee") designated by the Board of Directors of the Company and consisting of two or more nonemployee directors. The Committee shall have the power and authority as may be necessary to carry out the provisions of the Plan, including the interpretation and construction of the Plan and the grants made under the Plan, the adoption of such rules and regulations as it may deem advisable and the termination of further grants under the Plan. The Committee shall also have the total discretion to determine the individuals to whom grants are to be made under the Plan, the form of each grant, the number of shares of the Common Stock subject thereto, the terms and conditions thereof and the form of agreement reflecting the terms and conditions of the grant. For purposes of option grants under the Plan, the fair market value of the Common Stock on the date of grant shall be (i) the closing price per share thereof on such date if traded on a national securities exchange or the National Market System of NASDAQ, (ii) the average of the bid and asked price thereof at the close of trading on such date if traded on the over-the-counter market or (iii) as determined in good faith by the Committee if not so traded. 5. Rights as a Stockholder Until such time as an option granted under the Plan has been exercised and the shares acquired thereby have been issued and delivered pursuant to such exercise, the optionee shall have no rights as a shareholder with respect to the shares subject to the option. 6. Nontransferability Options granted under the Plan may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable during the lifetime of the optionee only by the optionee. Notwithstanding the foregoing, options, to the extent vested, may be transferred by an optionee to any member or members of the family of the optionee or to any trust established for their benefit. 7. Compliance with Securities Laws If any shares to be issued under the Plan have not been registered under any applicable securities laws, the Company's obligation to issue such shares shall be conditioned upon receipt of a representation in writing that the optionee is acquiring such shares for his or her own account and not with a view to the distribution thereof and the certificate representing such shares shall bear a legend in such form as the Company's counsel deems necessary or desirable. In no event shall the Company be obligated to issue any shares under the Plan if, in the opinion of the Company's counsel, such issuance would result in a violation of any applicable securities laws. 8. Stock Adjustments (a) In the event of a stock dividend, stock split, recapitalization, merger in which the Company is the surviving corporation or other capital adjustment affecting the Common Stock, an appropriate adjustment shall be made, as determined by the Board of Directors of the Company, to the number of shares subject to the Plan and the number of shares and the exercise price per share with respect to any option outstanding under the Plan. (b) In the event of the complete liquidation of the Company or of a reorganization, consolidation or merger in which the Company is not the surviving corporation, any option outstanding under the Plan shall become fully and immediately exercisable unless either (i) the Board of Directors of the Company otherwise modifies such option or (ii) the surviving corporation issues or assumes a stock option providing for equitable adjustment of the terms and conditions of the option outstanding under the Plan. 9. Effectiveness of the Plan The Plan was initially approved on January 5, 1996 by resolution of the Board of Directors of the Company and became effective on February 6, 1996 upon the approval by the stockholders of the Company. The amendment to the Plan increasing the number of shares available for issuance thereunder from 1,800,000 to 1,900,000 was approved by the Board of Directors of the Company on January 29, 1997 and approved by the stockholders of the Company on March 20, 1997. 10. Amendment of the Plan The Board may at any time alter, amend, suspend or terminate the Plan in whole or in part, provided, however, that (i) no alteration, amendment, suspension or termination shall adversely affect the rights of an optionee with respect to any outstanding option granted under the Plan, (ii) the provisions of the Plan governing the terms of each option grant shall not be amended more than once every six months, other than to comport with changes in applicable law or the rules thereunder and (iii) any material amendment to the Plan shall become effective only upon approval of stockholders of the Company. -2- EMISPHERE TECHNOLOGIES, INC. DIRECTORS' DEFERRED COMPENSATION STOCK PLAN 25,000 Shares 1. Purpose The purpose of the Directors' Deferred Compensation Stock Plan (the "Plan") of Emisphere Technologies, Inc. (the "Company") is to attract, compensate and retain well qualified directors by providing them with deferred compensation for attending meetings of the Board of Directors or a committee thereof and with an equity interest in the Company's success. 2. Stock Subject to the Plan The Company may issue and deliver a total of 25,000 shares of its common stock, par value $.01 per share (the "Common Stock"), pursuant to the Plan. Such shares may be either authorized but unissued shares or treasury shares. 3. Administration The Plan shall be administered by the Board of Directors of the Company. The Board shall have the power and authority as may be necessary to carry out the provisions of the Plan, including the interpretation and construction of the Plan, the determination of the amount of compensation for attending each meeting, the adoption of such rules and regulations as it may deem advisable and the termination of further share issuances under the Plan. 4. Eligibility Eligibility to participate in the Plan shall be open to only those directors of the Company who (i) are neither officers nor employees of the Company or any of its subsidiaries, (ii) do not beneficially own five percent or more of the Common Stock outstanding and (iii) are not affiliated with any person who is such an officer, employee or owner. 5. Share Accounts The Company shall set up and maintain for each eligible director an account (each a "Share Account') representing the number of shares of the Common Stock which the Company is obligated in the future to issue and deliver to such director, determined as follows: (a) for each meeting attended by an eligible director, a number of shares of the Common Stock shall be added to his or her Share Account in an amount equal to (i) the amount determined by the Board of Directors as compensation for attending such meeting divided by (ii) the fair market value of the Common Stock as of the date of such meeting; (b) for each cash dividend or distribution paid by the Company with respect to the Common Stock, a number of shares of the Common Stock shall be added to each Share Account in an amount equal to (i) the amount of the dividend that would be paid if the shares in the Share Account were issued and outstanding shares of the Common Stock divided by (ii) the fair market value of the Common Stock as of the date of payment of such dividend or distribution; (c) As used herein, the fair market value of the Common Stock as of any date shall be the closing price of the Common Stock on the Nasdaq National Market on such date. In the event the Common Stock ceases at any time to be traded on the Nasdaq National Market, the fair market value of the Common Stock shall be determined in such manner as may be set by the Board of Directors of the Company (d) All share calculations shall be made to the nearest one thousandth of a share. 6. Issuance of Shares The Company shall within six months following the date each participant in the Plan ceases to be a director of the Company issue and deliver to such person all of the shares in his or her Share Account. In the event of the death of a director, such shares shall be delivered to the director's estate or legal representative. Nothing herein shall be deemed to confer any right to continue as a director of the Company or to limit the right of the Company to remove a director. 7. Rights as a Stockholder Until such time as the shares in a director's Share Account have been issued and delivered to the director in accordance with the terms of the Plan, the director shall have no rights as a stockholder with respect to the shares of the Common Stock in his or her Share Account. 8. Nontransferability of the Share Account The right to receive shares in a director's Share Account may not be assigned or transferred except by will or by the laws of descent and distribution and may be delivered during the life of the director only to the director. 9. Compliance with Securities Laws If the shares to be issued under the Plan have not been registered under the Securities Act of 1933, as amended, the Company's obligation to issue such shares shall be conditioned upon receipt of a representation in writing that the director is acquiring such shares for his or her own account and not with a view to the distribution thereof and the certificate representing such shares shall bear a legend in such form as the Company's counsel deems necessary or desirable. In no event shall the Company be obligated to issue any shares under the Plan if, in the opinion of the Company's counsel, such issuance would result in a violation of any federal or state securities laws. 10. Stock Adjustments (a) In the event of a stock dividend, stock split, recapitalization, merger in which the Company is the surviving corporation or other capital adjustment affecting shares of the Common Stock outstanding, an appropriate adjustment shall be made, as determined by the Board of Directors of the Company, to the aggregate number of shares the Company may issue under the Plan and the number of shares in each Share Account. (b) In the event of the complete liquidation of the Company, or of a reorganization, consolidation or merger in which the Company is not the surviving corporation, the Company shall prior thereto issue and deliver to each of the directors all of the shares in his or her Share Account. 11. Effectiveness of the Plan The Plan was adopted on September 11, 1997 by resolution of the Board of Directors of the Company and is effective as of such date. The Plan shall be submitted to the Company's stockholders for approval by the affirmative votes of the holders of a majority of the Common Stock present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Delaware. 12. Amendment of the Plan The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part, provided, however, that (i) no alteration, amendment, suspension or termination shall adversely affect the right of a director to receive the number of shares of the Common Stock in his or her Share Account and (ii) any amendment which must be approved by the stockholders of the Company in order to ensure that all transactions under the Plan continue to be exempt under Rule 16b-3 under the Exchange Act or any successor provision or to comply with any rule or regulation of a governmental authority, applicable securities exchange or Nasdaq National Market shall not be effective unless and until such stockholder approval has been obtained in compliance with such rule or regulation. -2- CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Emisphere Technologies, Inc. on Form S-8 (File Nos. 33-44516, 33-46026, 33- 62226, 33-88598, 333-2751, 333-29981 and 333-52547) and Form S-3 (File Nos. 33- 62224, 333-19815, 333-23423 and 333-52461) of our report dated October 12, 1998, on our audits of the financial statements of Emisphere Technologies, Inc. as of July 31, 1998 and 1997, and for each of the three years in the period ended July 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New York, New York October 28, 1998 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Emisphere Technologies, Inc. on Form S-8 (File Nos. 33-44516, 33-46026, 33- 62226, 33-88598, 333-2751, 333-29981 and 333-52547) and Form S-3 (File Nos. 33- 62224, 333-19815, 333-23423 and 333-52461) of our report dated October 8, 1998, on our audits of the financial statements of Ebbisham Limited as of July 31, 1998 and 1997, and for the period from September 26, 1996 (inception) to July 31, 1997, the year ended July 31, 1998 and the cumulative period from September 26, 1996 (inception) to July 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New York, New York October 28, 1998
 

5 This Schedule contains summary financial information extracted from the financial statements of Emisphere Technologies, Inc. at July 31, 1998 and is qualified in its entirety by reference to such financial statements. 12-MOS JUL-31-1998 AUG-01-1997 JUL-31-1998 21,538,308 13,469,733 7,710,056 0 0 43,267,684 13,943,571 4,323,715 53,690,010 11,810,751 10,000,000 0 0 110,372 31,170,776 53,690,010 15,868,310 15,868,310 0 24,578,188 0 0 236,250 (7,066,288) 0 (7,066,288) 0 0 0 (7,066,288) (0.66) (0.66)